Amo Tech, an Indian Company signs a contract to buy 1000 computers from a French retailer...

Amo Tech, an Indian Company signs a contract to buy 1000 computers from a French retailer Martin Bro. for €50 per computer on the condition that payment will be made at the time of delivery. Thus, Amo Tech expects that when they accept delivery of the computers, they will be obligated to pay the amount agreed upon of €50000, in the exchange rate of Rupee at the time of the sale. However, it took a few months for delivery. In the meantime, due to unforeseen circumstances, the value of the Indian Rupee depreciated.
a. Explain the role of foreign exchange risk management.
b. Discuss the impact of depreciation of rupees on the buyer and seller.

Expert Solution

When Rupee is depreciating against Euro Amo Tech needs to pay more Indian Rupee to get 50000 Euro to give to Martin Bro.

a. Hence, in such cases Amo tech could have hedge his position by buying EURINR future contract. In this case he will make money in future market and loose money in spot market and effect of depreciation of rupee will get nullified.

b. In case depreciation of Indian rupee Amo tech needs to pay more Indian rupee to buy . Hence, it is a loss for the buyer. But Martin Bro. will get the same amount of 50000 Euro and hence no loss or gain for seller.

jeff jeffy answered 2 years ago

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