Dow Chemical is to deliver chemicals to an Indian firm in one year and is supposed to receive 40 million rupee (INR) at the time of delivery. The current exchange rate is 34.5 rupee per dollar (INR/$) and the one year-forward rate is 40 rupee per dollar (INR/$). Dow’s one-year interest rates are 18% for rupee funds and 4% for dollar funds.
Suppose that Dow decides to hedge its exposure to the rupee. What are the alternatives available to Dow based on the information given? Which hedge is optimal for Dow?