Question

An exporter in India exports fruits to Oman enters into a contract with Omani importer to deliver OMR 10000 worth of fruits on 1st June 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 186.254 = 1 OMR. The fruits were delivered on 1st July 2019. Assuming that the forward contract price of INR/OMR is at a forward discount of 7% for 1st July and the spot rate of INR is expected to depreciate by 7% against OMR by July 2019.
a) Find out the amount of INR to be received by the dealer if he goes for forward contract to exchange OMR to INR.
b) Find out the amount of INR to be received by the dealer if he goes for actual price in July
c) If the dealer has an option to sell the OMR in July at 3 % depreciated value from June 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

Contract value - OMR 10000

Spot rate = INR 186.254 = 1 OMR

Forward discount = 7%, thus forward contract price = INR 186.254 * (1+7%) = INR 199.2918 / OMR

Spot rate to depreciate by 7%, thus expected spot price = INR 186.254 * (1+7%) = INR 199.2918 / OMR

a.  the amount of INR to be received by the dealer if he goes for forward contract to exchange OMR to INR

= contract value * Forward rate = 10000*199.2918 = INR 1,992,917.80

b.  the amount of INR to be received by the dealer if he goes for actual price:

= contract value * expected spot rate = 10000*199.2918 = INR 1,992,917.80

c. Option contract

Option price = 3% depreciation =  INR 186.254 * (1+3%) = 191.842

Option premium = 5%

Amount of INR received = (10000*191.842)-(10000*191.842*5%) =

= INR 1,918,416.20 - INR 95,920.81 = INR 1,822,495.39

Actual Price = 10000*186.254 = INR 1,862,540

Since the option value is lower than actual price and also lower the forward rate or the expected spot rate, the dealer should not accept the option.