Module: | MODULE A: INTERNATIONAL BANKING
Q16: An Indian software exporter based in Bengaluru expects a guaranteed remittance of 50,00,000 Euros from a European client after exactly six months. The exporter fears that the Euro might depreciate heavily against the Indian Rupee by the time the payment arrives, which would severely reduce their domestic revenue. However, the exporter also wishes to retain the full ability to sell the Euros at the prevailing market spot rate if the Euro unexpectedly appreciates against the Rupee. To perfectly achieve this specific asymmetric hedging objective under current regulatory guidelines, which specific derivative product must the exporter execute with their Authorized Dealer?
✅ Correct Answer: B
🎯 Quick Answer:
Option B is the only instrument that provides downside protection while retaining upside potential.Structural Breakdown: 1. Analyze the risk profile.
The exporter is receiving Euros.
Their risk is that the Euro value falls, meaning it depreciates.
They need the right to sell Euros at a guaranteed minimum price.
2. Evaluate Option A, which is a Forward Contract.
A forward contract is a binding obligation.
If the Euro appreciates, the exporter is legally forced to sell at the lower contracted rate, losing the upside profit.
This fails the scenario objective.
3. Evaluate Option B, which is a Put Option.
A Put option gives the buyer the right to sell the underlying asset.
By purchasing a Put option, the exporter locks in a floor price.
If the Euro crashes, they exercise the option and sell at the guaranteed high strike price.
If the Euro skyrockets, they let the option expire worthless and sell their Euros in the open market at the new, highly profitable spot rate.
This perfectly matches the objective.
4. Evaluate Option C, which is a Call Option.
A Call option gives the right to buy.
The exporter already has Euros coming, so they do not need to buy more.
Causal Reasoning: Options act like financial insurance policies.
The exporter pays an upfront premium to buy the Put option, sacrificing a small known amount, which is the premium, to eliminate infinite downside risk while retaining infinite upside potential.