Question

An importer in India imports minerals from Oman enters into a contract with Omani exporter to deliver OMR 20000 worth of minerals on 1st September 2019 payment to be received within one month from the date of delivery. The exchange rate in spot market on the date of transaction is OMR0.00555=1 INR. The minerals were delivered on 1st November 2019. Assuming that the forward contract price of OMR/INR is at a forward discount of 8% for 1st December and the spot rate of INR is expected to depreciate by 8% against OMR by December 2019.

a. Find out the amount of INR to be paid by the dealer(importer) if he goes for forward contract to exchange INR to OMR

b. Find out the amount of INR to be paid by the importer if he goes for actual price in July

c. If the Indian dealer has an option to buy the OMR in December at 3 % depreciated value from September spot rate with 5 % premium, should he accept the option. If he accepts the options find out the amount of OMR received by him and the difference between option price and actual price.

Answer 1

Sol (A):

INR paid by importer on forword contract

spot rate on 1st nov.= OMR 0.00555/INR or

we can say 1/0.00555 = INR180/OMR

INR forword rate discount on 8% means appreciation on OMR, so the forwod rate will be-

180*[1+(0.08*30/365)]

= INR 181/OMR

Amount paid by dealer on 1st dec. = 181*20000

INR 36,20,000

Sol(B):

Amount paid by importer on spot rate

spot rate is expected to depreciate by 8% means appreciation in OMR, so the spot rate is-

180*1.08 = INR 194.4/OMR

Amount paid on spot rate 1st dec. = 20000*194.4

= 38,88,000

Sol (C):

Payment made on an option:

Exchange rate after 5% premium on spot = 180*0.95

= 171.00

(+) Depreciation by 3% = 5.13

= INR176.13/ OMR

Amount payable on option available = 176.13*20000

= INR 35,22,600

Omani Exporter received OMR on 1st dec. at spot rate = 35,22,600/194.4

= OMR 18120

Difference between option available and actual amount received = 20000-18120

= OMR 1880