Embedded Derivative in Foreign Currency Purchase: Dollar Forward (Short) Explained

Let me give you an example of an embedded derivative that is very interesting but slightly difficult. Imagine I enter into a contract to purchase a machine from someone for $100,000, with the agreement that I will actually buy the machine and make the payment after three months. The contract is finalized, and the $100,000 price for the machine is locked in. Today, the exchange rate is ₹90 for one dollar, but when I make the payment in three months, I will have to pay based on whatever the dollar exchange rate is at that specific time. Now, understand it this way: if after three months the dollar rate rises from ₹90 to ₹120 for $1, I will have to pay ₹120 lakhs, which will cause me trouble and be painful. Conversely, if the dollar rate drops from ₹90 to ₹70, I will only have to pay ₹70 lakhs, and I will feel good because my payment is much less. As you can see, I suffer a loss from the dollar's upward movement, but I gain a benefit when the dollar moves downward. Ultimately, I am being forced to pay more or less simply because of the movement in the underlying asset, which is the dollar. Therefore, while the core contract is just for purchasing a machine, it also clearly includes an embedded derivative: a dollar forward short. By "short," it means that if the price goes up, it hurts me, and if the price goes down, it benefits me. This specific type of embedded derivative is exactly the kind of concept that students often find a little problematic to understand. #EmbeddedDerivative #DollarForward #ForexRisk #IndAS109 #IFRS9 #FinancialInstruments #DerivativeAccounting #CAStudents #FinanceConcepts #ForeignExchange #HedgingConcepts #CorporateFinance -- Concepts with in depth clarity📝 At Sudarshan Agrawal Classes (SAGC), we don’t just prepare you to clear the CA | CMA Exam — we prepare you to excel in your career. Here’s why we stand out: ✔ Think & participate actively ✔ Develop concepts that last a lifetime ✔ No boring lectures—understanding is our priority ✔ Step-by-step learning with relatable examples With 30 years of teaching expertise, Sudarshan Sir has mentored countless CA & CMA professionals. Now it is YOUR turn to succeed! Don’t settle for less. Invest in your future today! Click the link in bio to start your journey! #FinancialAssets #Investing101 #WealthBuilding #FinancialLiteracy #IndAS #IFRS9 #SPPITest #AmortizedCost #FVTPL #FVTOCI #FinancialInstruments #AccountingConcepts #ProfessionalExams #CommerceStudents