Question

At the moment the exchange rate of IDR / USD is IDR 10,000 / USD. If in one month a company needs as much as $ 1,000,000 dollars, and the probability that the exchange rate of Rp / USD will increase to Rp. 12,000 / USD is 0.6; still Rp. 10,000 / USD is 0.3, and it drops to RP. 9,000 / USD is 0.1, specify:

a. Calculate the expected value of the rupiah exchange rate in the next month?

b. If there is an option offer the right to buy $ 1,000,000, - for Rp. 10,000 / USD with a premium of Rp. 50,000,000, - should the company buy this option?

c. How much will the company gain / lose if it turns out that in one month the exchange rate is IDR 9,000 / USD.

d. How much will the company gain / lose if it turns out that in one month the exchange rate is IDR 12,000 / USD.

Answer 1

Solution

a.Calculating the expected value of the rupiah exchange rate in the next month :

Expected Value = (12,000 * 0.6) + (10,000 * 0.3) + (9,000* 0.1)

= R_P11,100 / USD

b.Offer evaluation :

Dollars Needed in one month = $10,00,000 ; Exchange rate = R_P10,000 /USD ; Option premium = R_P 50,000,000

So,company needs to pay R_p 10,000,000,000 (without premium)

Total = 10,000,000,000 + 50,000,000 => 10,050,000,000

So,the total exchange rate incurred = R_p 10,050 / USD

It is beneficial to claim this offer since after one month the expected exchange rate would be R_p 11,000

c.

Present exchange rate = R_P 10,000 / USD ;New excahnge rate = R_P 9,000 / USD

The company needs 1,000,000 USD so acc. the new exchange rate it will have to pay R_P 1000 less than previous (i.e., 10,000 - 9,000)

So,savings / Gains in terms of R_p = 1,000,000 * 1000 => 1,000,000,000

d.

Present exchange rate = R_P 10,000 / USD ;New excahnge rate = R_P 9,000 / USD

The company needs 1,000,000 USD so, acc. the new exchange rate it will have to pay R_P 2000 more than previous (i.e., 10,000 - 12,000)

So,loss in terms of R_p = 1,000,000 * 2000 => 2,000,000,000

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