Procter and Gamble’s affiliate in India, P&G India, procures much of its toiletries product line from a Vietnamese company. Because of the shortage of working capital in India, payment terms by Indian importers are typically 180 days or longer. P&G India wishes to hedge a 10 million Vietnamese dong payable. Although options are not available on the Indian rupee, forward rates are available against the dong. Additionally, a common practice in India is for companies like P&G India to work with a currency agent who will, in this case, lock in the current spot exchange rate in exchange for a 3.85% fee. Using the following exchange rate and interest rate data, recommend a hedging strategy.
180-day account payable (VND) 10,000,000
Spot rate (VND/INR) 346.49
180-day forward rate (VND/INR) 338.28
Expected spot rate in 180 days (VND/INR) 339.86
180-day INR investing rate 6.00%
180-day VND investing rate 1.80%
Currency agent's exchange rate fee 3.85%
P & G India's cost of capital 10.00%