ABC Ltd., a company engaged in the manufacturing business, imported its raw material from the U.S.A worth USD 10,000,000. The payment is required to be made in 90 days. The exporter of the raw material has offered an interest-free credit period of 50 days and for the remaining period of 40 days interest of 9% per annum will be charged.The company approached its local bankers who quoted an interest rate of 10% p.a. for a 40-day loan. The exchange rates provided by the bank are as follows:Spot (USD/INR)80.3450 days forward (USD/INR)81.1690 days forward (USD/INR) 81.79As a Financial Analyst of the company, you are required to evaluate the following options and provide a conclusion that which alternative is better and by what amount it will save the outflows for the company in INR:Make the payment in 50 days, orAvail the Exporter's offer of 90 days credit period.Note: Use 365 days in a year for the calculations and round off all the values to the nearest rupee.Alternative 1 is better by INR 820,494,247Alternative 1 is better by INR 5.472,712Alternative 2 is better by INR 5.472.712Alternative 2 is better by INR 825.966,959

Companies do financial analysis in order to minimze their losses. In this case, we are to see the…

ABC Ltd., a company engaged in the manufacturing business, imported its raw material from the U.S.A worth USD 10,000,000. The payment is required to be made in 90 days. The exporter of the raw material has offered an interest- free credit period of 50 days and for the remaining period of 40 days interest of 9% per annum will be charged. The company approached its local bankers who quoted an interest rate of 10% p.a. for a 40-day loan. The exchange rates provided by the bank are as follows: A Spot (USD/INR) 50 days forward (USD/INR) 90 days forward (USD/INR) 80.34 81.16 81.79 As a Financial Analyst of the company, you are required to evaluate the following options and provide a conclusion that which alternative is better and by what amount it will save the outflows for the company in INR: Make the payment in 50 days, or Avail the Exporter's offer of 90 days credit period. Note: Use 365 days in a year for the calculations and round off all the values to the nearest rupee. Alternative 1 is better by INR 820,494,247 Alternative 1 is better by INR 5.472.712 Alternative 2 is better by INR 5.472.712

ABC Ltd., a company engaged in the manufacturing business, imported its raw material from the U.S.A worth USD 10,000,000. The payment is required to be made in 90 days. The exporter of the raw material has offered an interest- free credit period of 50 days and for the remaining period of 40 days interest of 9% per annum will be charged. The company approached its local bankers who quoted an interest rate of 10% p.a. for a 40-day loan. The exchange rates provided by the bank are as follows: A Spot (USD/INR) 50 days forward (USD/INR) 90 days forward (USD/INR) 80.34 81.16 81.79 As a Financial Analyst of the company, you are required to evaluate the following options and provide a conclusion that which alternative is better and by what amount it will save the outflows for the company in INR: Make the payment in 50 days, or Avail the Exporter's offer of 90 days credit period. Note: Use 365 days in a year for the calculations and round off all the values to the nearest rupee. Alternative 1 is better by INR 820,494,247 Alternative 1 is better by INR 5.472.712 Alternative 2 is better by INR 5.472.712

Essentials Of Investments

11th Edition

ISBN:9781260013924

Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.

Chapter1: Investments: Background And Issues

Section: Chapter Questions

Problem 1PS

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Concept explainers

Exchange Rate Risk

It is the possibility that the value of a currency will fluctuate in the future. In the wake of globalization, business establishments have increasingly ventured into international markets. The volume of international trade has prospered excellently in the near past and is expected to be more affluent in the future. The use of exchange-traded derivative financial instruments has been multi-folded to provide for the requirements of various MNCs and offshore potential investors. Most banks and financial institutions have helped integrate the global economies. Our Government has introduced some bold and extreme measures to fulfil the purpose behind the fiscal, industrial, and monetary policies. The enactment of GST is a huge step towards streamlining the taxation system of the country. Owing to Covid-19, this aspect of corporate risk management has become critical.

Question

ABC Ltd., a company engaged in the manufacturing business, imported its raw material from the U.S.A worth USD 10,000,000. The payment is required to be made in 90 days. The exporter of the raw material has offered an interest-
free credit period of 50 days and for the remaining period of 40 days interest of 9% per annum will be charged.
The company approached its local bankers who quoted an interest rate of 10% p.a. for a 40-day loan. The exchange rates provided by the bank are as follows:
Spot (USD/INR)
80.34
50 days forward (USD/INR)
81.16
90 days forward (USD/INR) 81.79
As a Financial Analyst of the company, you are required to evaluate the following options and provide a conclusion that which alternative is better and by what amount it will save the outflows for the company in INR:
Make the payment in 50 days, or
Avail the Exporter's offer of 90 days credit period.
Note: Use 365 days in a year for the calculations and round off all the values to the nearest rupee.
Alternative 1 is better by INR 820,494,247
Alternative 1 is better by INR 5.472,712
Alternative 2 is better by INR 5.472.712
Alternative 2 is better by INR 825.966,959

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