In Question 2.4, suppose that Arvind is not worried about risk provided that he can cover his costs. If he thinks that the exchange rate will change to 50 INR in 90 days, explain how he could use a forward contract to hedge his risk. Would Arvind want to hedge if he thinks that the exchange rate might rise above 60 but will not fall below 60?

Question 2.4

Arvind runs a small electronics company in India and has just sold some equipment to a U.S. company for $1.5 million to be paid in 90 days. His cost in Indian rupees (INR) is 90 million. The current exchange rate is 66 INR per dollar. How much profit in INR would Arvind earn if the exchange rate is unchanged in 90 days? What happens to his profit if the exchange rate goes to 70 INR per dollar in 90 days? At what exchange rate would Arvind just break even?