An Indian company is importing machine at a price of $ 5,00,000, payable after six months. The current exchange rate is ₹ 63 per US $. The forward contract for six months is available @ ₹ 64 per US $. If the rate turns out to be ₹ 64.25 per US $, the net gain to the importer in case he has entered into contract will be :
$ 1,25,000
Option 1 — ₹ 1,25,000 is correct.
The importer owes $ 5,00,000 in six months. By taking a forward cover he locks the buying rate at ₹ 64 per dollar. When the payment falls due, the spot rate has actually risen to ₹ 64.25 per dollar — an unhedged importer would have had to buy dollars at this higher rate.
The gain from having hedged equals the per-dollar saving multiplied by the exposure:
\( \text{Gain} = (64.25 - 64.00) \times 5{,}00{,}000 = 0.25 \times 5{,}00{,}000 = ₹\,1{,}25{,}000 \)
The forward contract protected the firm against an adverse (depreciating rupee) movement, converting an uncertain future cost into a certain one and yielding a ₹ 1,25,000 benefit relative to leaving the position open. (The option label shows a currency-sign typo; the amount 1,25,000 is in rupees.)
Why the others are wrong: ₹ 2,50,000 doubles the spread; ₹ 5,00,000 is merely the dollar exposure; ₹ 6,25,000 multiplies the exposure by 1.25 rather than by the 0.25 saving.
Takeaway: Hedging gain = (actual spot − forward rate) × exposure = ₹ 1,25,000.
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