Financial Risk Management
Hedge a currency payable
What happens to an importer if the rupee weakens before payment?
An importer who owes dollars loses purchasing power when USD costs more INR. A forward can fix the INR cost.
INR cost = USD payable × INR per USD
Multiply the dollar invoice by rupees per dollar. $10,000 × ₹84/USD = ₹840,000. USD cancels, leaving INR.
A $10,000 payable at a forward rate of ₹84/USD costs ₹840,000 under the contract.
Multiply the dollar invoice by rupees per dollar. $10,000 × ₹84/USD = ₹840,000. USD cancels, leaving INR.
The importer owes $10,000. Which forward direction fixes its cost?