Mumbai Solutions is an organization providing IT solutions to companies in India and other countries.

The majority of customers are from the USA, Germany, United Kingdom, Australia, and Canada. It also
has its recovery centre in Singapore. In order to finance its capital requirements, it has raised funds from
Japan. It has issued Japanese yen bonds for 100 million with a maturity of five years on January 1, 2009, at
2% coupon payable semi-annually on June 30 and December 31 of every year.

On January 1, 2010, it has estimated the following payment schedule for its customers:

Customers in the USA will pay USD 12 million on March 28 and USD 15 million on June 27.
Customers in Europe will pay EUR 5 million on April 25 and EUR 7 million on June 27.
Customers in the United Kingdom will pay GBP 2 million on February 28 and GBP 3 million on
June 27.
Customers in Australia will pay AUD 7 million on March 28 and AUD 15 million on June 27.
Customers in Canada will pay CAD 12 million on March 28 and CAD 20 million on June 27.
The Singapore recovery center will need Singapore dollars (SGD) 9 million on March 28 and June
27 to take care of expenses.

Since the exchange rates are volatile, it has decided to hedge the currency risk using forward contracts
and futures contracts. On January 1, the following contracts are available in the NSE:

Table 1 shows the quotes from the NSE: All quotes show Indian rupees per unit of foreign currency,
except for JPY, where it shows Indian rupees per JPY 100.
Table 1 Futures Prices
Currency pair
USDINR
USDINR
USDINR
USDINR
USDINR
USDINR
USDINR
EURINR
EURINR
EURINR
EURINR
EURINR
EURINR
EURINR
GBPINR
GBPINR
GBPINR
GBPINR
GBPINR

Maturity
Spot (January 1)
January 27
February 28
March 28
April 25
May 30
June 27
Spot (January 1)
January 27
February 28
March 28
April 25
May 30
June 27
Spot (January)
January 27
February 28
March 28
April 25

Price (INR)
45.5632
45.5845
45.6123
45.6473
45.6852
45.7394
45.7876
61.3468
61.5321
61.7483
61.9345
62.3128
62.4572
62.6632
78.3687
78.5782
78.8345
79.1242
79.2485

GBPINR
GBPINR
JPYINR
JPYINR
JPYINR
JPYINR
JPYINR
JPYINR
JPYINR

May 30
June 27
Spot (January)
January 27
February 28
March 28
April 25
May 30
June 27

79.4579
79.6231
50.1234
50.2925
50.4565
50.6328
50.7569
50.9293
51.5378

Mumbai Solutions wants to hedge the currency risk on these four currencies. It approaches a bank for
forward rates on these four currencies, and the quotes for forward rates are very similar to the quotes for
futures contracts for these four currencies. Since they also have exposure to Singapore dollars, Canadian
dollars, and Australian dollars, they have collected the following data:
Table 2 Forward quotations on SGD, AUD, and CAD
Currency pair
SGDINR
SGDINR
SGDINR
SGDINR
SGDINR
SGDINR
SGDINR
AUDINR
AUDINR
AUDINR
AUDINR
AUDINR
AUDINR
AUDINR
CADINR
CADINR
CADINR
CADINR

Maturity
Spot (January 1)
January 27
February 28
March 28
April 25
May 30
June 27
Spot (January 1)
January 27
February 28
March 28
April 25
May 30
June 27
Spot (January 1)
January 27
February 28
March 28

Price (INR)
32.9465
33.1279
33.3547
33.5785
33.7476
33.8792
34.0245
39.7853
39.9423
40.1257
40.3468
40.6645
40.8123
40.9785
42.2582
42.3978
42.5689
42.7135

CADINR
CADINR
CADINR

April 25
May 30
June 27

42.8793
43.0372
43.2753

Correlations of CADINR, AUDINR, and SGDINR exchange rates with the futures of the four
currencies have been estimated as:
Table 3 Correlations
Correlations
SGDINR

USDINR
0.92

EURINR
0.88

GBPINR
0.84

JPYINR
0.92

AUDINR
0.94
0.91
0.96
0.91
CADINR
0.98
0.92
0.95
0.91
The standard deviations of the exchange rates and the futures are the same across all pairs of currencies.
1) Should Mumbai Solutions use forward contracts or futures contracts for hedging? Explain
your reasoning.
2) If you use futures contract to hedge each of the currency risk listed, explain how you would
hedge?
3) If you use forward contracts to hedge each of the currency risk listed, explain how you would
hedge.
4) Assume that the spot exchange rates on various dates on which futures or forwards mature
are as shown below: Calculate the total amount of rupee flow if you (a) hedge using futures;
(b) hedge using forwards; and (c) do not hedge at all.
5) If you believe that Indian rupee will appreciate against all these currencies, what would be
your rationale for hedging?
6) If you believe that the Indian rupee will be fluctuating within 0.05 per cent of its current spot
rate, what would be your rationale for hedging?
Table 4 Expected Spot rates
Currency pair
USDINR
USDINR
USDINR
EURINR
EURINR
EURINR
GBPINR
GBPINR
GBP-INR
GBPINR
JPYINR
JPYINR
JPYINR
AUDINR
AUDINR
AUDINR
CADINR
CADINR
CADINR

Maturity
Spot (January 1)
March 28
June 27
Spot (January 1)
April 25
June 27
Spot (January 1)
February 28
March 28
June 27
Spot (January 1)
March 28
June 27
Spot (January 1)
March 28
June 27
Spot (January 1)
March 28
June 27

Price (INR)
45.5632
45.6238
45.6985
61.3468
62.4543
62.7543
78.3687
78.9432
79.0847
79.4385
50.1234
50.3765
51.3795
39.7855
40.4252
41.1245
42.2582
42.6943
43.1943

SGDINR
SGDINR
SGDINR

Spot (January 1)
March 28
June 27

32.9465
33.3895
33.7954