Question

An Omani dates dealer enters into a contract with Indian importer to deliver INR 100000 worth of dates on 1st May 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 INR 184.254 = 1 OMR. The dates were delivered on 1st June 2019. Assuming that the forward contract price of INR is at a forward discount of 5% for 1st July and the spot rate of INR is expected to depreciate by 5% against OMR by July 2019.
a. .Find out the amount of OMR to be received by the dealer if he goes for forward contract to exchange INR to OMR.
b. Find out the amount of OMR to be received by the dealer if he goes for actual price in July
c. If the dealer has an option to sell the INR in July at 4 % depreciated value of OMR from May spot rate with 6% 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

Worth of Dates in INR as on 1st May 19: INR 100000

Worth of Dates in OMR as on 1st May 19: OMR 542.73(approx) (i.e 100000/184.254)

A) If the Dealers goes for Forward Contract:

The forward contract price of INR is at a forward discount of 5% for 1st July and the spot rate of INR is expected to depreciate by 5% against OMR by July 2019.

Conversion rate on 1st July 19: INR 193.467 = 1 OMR ( i.e INR 184.254 + 5%)

Forward contract rate on 1st July 19: INR 183.793 = 1 OMR ( i.e INR 193.467 - 5%)

Amount to be received by the Dealer: OMR 544.09(approx) (i.e 100000/183.793)

B) If the Dealer goes for Actual conversion rate on 1st July 19

The spot rate of INR is expected to depreciate by 5% against OMR by July 2019.

Conversion rate on 1st July 19: INR 193.467 = 1 OMR ( i.e INR 184.254 + 5%)

Amount to be received by the Dealer: OMR 516.88(approx) (i.e 100000/193.467)

C) If Dealer goes for Forward rate on 1st July 19

The dealer has an option to sell the INR in July at 4 % depreciated value of OMR from May spot rate with 6% premium

Conversion rate on 1st July 19: INR 191.624 = 1 OMR ( i.e INR 184.254 + 4%)

Forward contract rate on 1st July 19: INR 203.122 = 1 OMR ( i.e INR 191.624 + 6%)

Amount to be received by the Dealer: OMR 492.31(approx) (i.e 100000/203.122)

Difference between Forward contract and actual conversion:

Amount to be received by the Dealer through Actual conversion: OMR 521.86(approx) (i.e 100000/191.624)

Amount to be received by the Dealer through Forward contract: OMR 492.31(approx) (i.e 100000/203.122)

Difference: OMR 521.86 - OMR 492.31 = OMR 29.55