Receivable due in 3 months, in Indonesian rupiah (Rp)
Spot rate (Rp/$)
Expected spot rate in 90 days (Rp/$)
3-month forward rate (Rp/$)
Minimum dollar amount acceptable at settlement
Settle A/R in 90 days at current spot rate.
If spot rate in 90 days is same as current
(Rp750,000,000 / Rp8,800/$)
If spot rate in 90 days is Rp9,400/$
(Rp750,000,000 / Rp9,400/$)
If spot rate in 90 days is Rp9,800/$
(Rp750,000,000 / Rp9,800/$)
Sell Indonesian rupiah forward.
A/R sold forward 90 days
"Cost of cover" is the forward discount on Rp
The Indonesian rupiah has been highly volatile in recent years. This means that during the 90-day period,
any variety of economic or political or social events could lead to an upward bounce in the exchange rate,
reducing the dollar proceeds at settlement to an unacceptable level.
Unfortunately, the forward contract does not result in dollar proceeds which meet the minimum margin.
The cost of forward cover, 20.1%, is indicative of the "artificial interest rates" used by some financial