question archive An Australian exporter has supplied goods to India and will receive 5 million Indian rupees (INR) in one year
An Australian exporter has supplied goods to India and will receive 5 million Indian rupees (INR) in one year
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An Australian exporter has supplied goods to India and will receive 5 million Indian rupees (INR) in one year. The exporter expects that the INR will be selling at 12.48% premium against the Australian dollar (A$) in the one-year forward contract. The spot exchange rate is A$0.2564 and the exporter wants to sell INR5 million in the one-year forward contract. How much Australian dollar the exporter will make a profit after one year?
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A$160,000
Step-by-step explanation
Note that the fact INR would sell at 12.48% premium against the Australian dollar means that in a year's time 1 INR would command 12.48% more of Australian dollar.
Forward exchange rate=spot rate*(1+premium)
spot rate=A$0.2564
premium=12.48%
Forward exchange rate=A$0.2564*(1+12.48%)
Forward exchange rate=A$0.2564*1.1248
Forward exchange rate=A$0.2884
Profit after one year=(forward exchange rate-spot rate)*INR5 million
Profit after one year=(A$0.2884-A$0.2564)*INR 5 million
Profit after one year=A$160,000
