An Indian company imported goods from US. The US manufacturer invoices the shipment in Dollar (USD), and the amount is USD 5 million. The importer needs to pay the amount by 30 October 2023. The data regarding the futures contract as on 10 October 2023 is: Interbank Spot Market USD-INR 80.2725 - 80.2775 NSE futures: USD INR 281023 80.3175- 80.3250 

Questions: 

Explain the process of hedging with currency futures for the above case, if the spot rate turns out to be INR 79.1250 on 28th October. What is the notional loss/profit of the Indian company when compared to the actual spot rate on October 28th? (Assume that the futures settlement rate is the same as the spot rate on the contract expiry date.) Also, if the spot rate was 81.6250 on the expiry date, what would be the company’s notional profit for having decided to hedge the exposure?

n

Answer rating: 100% (QA)

Hedging with currency futures is a common risk management strategy used by companies to reduce or el... View the full answer