Commodity balance and an importer’s exchange-rate exposure

The case and its answers

Every question of this case, with its answer and why each other option is wrong.

A country begins a period with 100 thousand tonnes of a commodity, produces 40 thousand tonnes and imports 10 thousand tonnes. Domestic consumption is 120 thousand tonnes, with no exports or other inventory changes. Separately, a manufacturer must pay US$100 per unit for an imported input. The international dollar price is unchanged, but the exchange rate moves from ₹80 to ₹88 per US dollar. For a hedge comparison, assume the manufacturer could have bought the required dollars forward at ₹82 per dollar with no additional fee. The inventory data and currency scenarios are fictional and do not establish a forecast of the commodity’s market price.

All people, firms, prices and contract terms are fictional.

Ignore taxes and transaction costs unless the case explicitly includes them.

1. Q1What closing inventory follows the national balance?

   • A

     Option A. 30 thousand tonnes — Correct answer

   • B

     Option B. 70 thousand tonnes

     Why it is wrong: This is the reduction from opening inventory.

   • C

     Option C. 150 thousand tonnes

     Why it is wrong: This is supply before consumption.

   • D

     Option D. −10 thousand tonnes

     Why it is wrong: This omits domestic production.

   Answer: A. 100 + 40 + 10 − 120 = 30 thousand tonnes. Remember: Commodity analysis starts with a consistent supply-demand balance.

   Hint, shown before you answer in practice mode: Opening stock plus production and imports, less consumption, gives closing stock.

   XV-S2-C05-Q1easynumerical

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2. Q2What is the manufacturer’s rupee cost per unit after the exchange-rate move?

   • A

     Option A. ₹8,800 — Correct answer

   • B

     Option B. ₹8,200

     Why it is wrong: This is the separate forward-hedged cost.

   • C

     Option C. ₹880

     Why it is wrong: This omits a factor of ten in the dollar amount.

   • D

     Option D. ₹8,000

     Why it is wrong: This uses the earlier exchange rate.

   Answer: A. US$100 × ₹88/US$ = ₹8,800. Remember: A domestic buyer can face a price increase even when the foreign-currency price is unchanged.

   Hint, shown before you answer in practice mode: Multiply the dollar invoice by the new rupees-per-dollar rate.

   XV-S2-C05-Q2mediumnumerical

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3. Q3What percentage increase in rupee cost results from the currency move?

   • A

     Option A. 8%

     Why it is wrong: This confuses the rupee exchange-rate change with a percentage.

   • B

     Option B. 9.09%

     Why it is wrong: This divides by the new rather than the original cost.

   • C

     Option C. 0%

     Why it is wrong: This ignores the exchange-rate translation.

   • D

     Option D. 10% — Correct answer

   Answer: D. (₹8,800/₹8,000 − 1) × 100 = 10%. Remember: Price changes must be measured relative to the original comparison base.

   Hint, shown before you answer in practice mode: Compare the new ₹8,800 cost with the original ₹8,000.

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4. Q4What rupee cost per unit would the stated forward rate lock in?

   • A

     Option A. ₹600

     Why it is wrong: This is the benefit versus the new spot outcome, not the total cost.

   • B

     Option B. ₹8,200 — Correct answer

   • C

     Option C. ₹8,800

     Why it is wrong: This is the unhedged new spot cost.

   • D

     Option D. ₹8,000

     Why it is wrong: This is the original spot cost.

   Answer: B. US$100 × ₹82/US$ = ₹8,200. This saves ₹600 against the specified ₹88 spot outcome, though a different spot outcome could reverse the benefit. Remember: A forward hedge fixes the specified exchange-rate exposure rather than guaranteeing a saving in every scenario.

   Hint, shown before you answer in practice mode: Apply the agreed ₹82 rate to the same US$100 invoice.

   XV-S2-C05-Q4mediumnumerical

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