2016 Chapter 6 - International Finance

Transcription

International Finance
Question 1
What is an Exchange Rate?
Part 1 – Basics
Answer
A rate, at which a currency can be exchanged i.e. bought or sold in terms of another
currency, is known as exchange rate.
In other words, it is a rate at which the currency is “quoted” in terms of another currency.
“In an exchange rate, two currencies are involved (a pair)”.
Question 2
What do you mean by Direct Quote?
Answer
When exchange rate is quoted in the form of x number of units of domestic currency for
each unit of foreign currency then such a quote is known as a direct quote
E.g. ` 45 per US $ is a direct quote for US $ in India.
It should be noted that in a direct quote the commodity involved is 1 unit of foreign
currency. As in the above example US $ is the commodity. Therefore, when exchange rate is
quoted in the form of amount of ` required to buy or sell one US $ then such a quote is
direct quote.




A direct quote expresses the exchange rate in terms of “home currency per unit of the
foreign currency”.
A direct Quote indicates the number of units of the domestic currency required to buy
one unit of foreign currency.
In a direct quote the foreign currency is the commodity which is being brought and sold”.
“In a direct quote the price comes first, the commodity comes next.”
“A direct quote is a quote where the exchange rate is expressed in terms of number of units
of the domestic currency per unit of foreign currency. Therefore, when we say $1 = ` 42.50,
we are expressing one unit of dollar (a foreign currency for an Indian) in terms of some units
of domestic currency.
Question 3
What do you mean by Indirect Quote?
Answer
An indirect quote expresses the exchange rate in terms of “foreign currency per unit of
domestic currency”. In other words, it is the number of units of foreign currency required to
buy or sell one unit of domestic currency. For example, Re 1 = 0.02 USD is an indirect quote
for the Rupee. In an indirect quote, the commodity being bought and sold is the home
currency.
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CA Nikhil Jobanputra
Incito Academy – Final CA – Strategic Financial Management
If the above example, in Question 2, of direct quote is expressed as an inverse then it
becomes an indirect quote. In other words amount of Rupees per $ is a direct quote then
amount of $ per Rupee will be an indirect quote.
If ` 50 can be exchanged for 1$ then 1/50 = 0.02 $ are require for each rupee
`/$ = 50 (Direct Quote)
$/` = 0.02 (Indirect Quote)
It should be noted that in an indirect quote the domestic currency is the commodity which
will remain constant and what changes is the foreign currency.



An indirect quote indicates the number of units of foreign currency that can be exchange
for one unit of the domestic currency.
“In an indirect quote the domestic currency is the commodity”.
“An indirect quote is the reciprocal of the direct quote and vice versa”.
In other words, an indirect quote is a quote where the exchange rate is expressed in terms
of number of units of the foreign currency per fixed number of units of domestic currency.
Therefore, when we say ` 100 = $0.2245, we are expressing a standard unit of rupee (a
domestic currency for an Indian) in terms of some units of foreign currency (i.e., $).
Question 4
What do you mean by Two Way Quote?
Answer
Two Way Quote refers to quoting exchange rates by an exchange dealer in terms of Buying
(Bid) Rate and Selling (Ask) Rate. In other words, two-way quote indicates a price at which
the banker is ready to buy and the banker is ready to sell 1 unit of foreign currency.
For example, a two-way quote in INR for USD will read: `/$ - 50.25 – 50.75.
This quote can be interpreted as follows:
Here, the first figure ` 50.25 denotes the rate at which bank “bids” or “buys” the second
currency, in the pair of currencies, namely, US Dollar (It is the bank’s rate for buying USD by
tendering Rupees).
The second figure ` 50.75 denotes the rate at which the bank “sells” the second currency in
the pair of currencies, namely, US Dollar (It is the bank’s rate for selling $ in order to get
Rupees). In short, the bank buys $ at ` 50.25 and sells $ at ` 50.75.
Question 5
What do you mean by Bid Rate and Ask Rate?
Answer
Bid rate is a rate at which the banker or authorized dealer is willing to buy the currency and
Ask rate is the rate at which the banker is willing to sell the currency.
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

Bid rate is a rate at which a customer can sell a foreign currency.
Ask rate is a rate at which a customer can buy a foreign currency.
You can buy any currency from a Bank. You can also sell any currency to a Bank. The rate at
which the bank buys a currency is called the “Bid” rate of that currency. The rate at which
the bank sells a currency is called the “Ask” rate of that currency.
In a direct quote the bid or ask, as the case may be, is of bid or ask on the foreign currency.
In an indirect quote, the Bid or Ask, as the case may be, is a bid or ask on the domestic
currency.
For instance if the bid rate for USD is ` 52, it means that the bank is ready to buy 1$ for ` 52.
If the ask rate for USD is ` 54, it means that the bank is (asking if someone will buy) selling 1$
for ` 54.
Remember, if a bank is buying a currency from you, you will be selling that currency to that
bank. Similarly, if a bank is selling a currency to you, you will be buying that currency from
that bank. In other words, the bank’s buying rate (Bid) is your selling rate and the bank’s
selling rate (Ask) is your buying rate. In our above example, when the bank is buying $ from
you, you are selling $ to the bank and when the bank is selling $ to you, you are buying $
from the bank.
Question 6
What do you mean by Spread?
Answer
This difference between the banks buying rate (bid rate) and the bank’s selling rate (ask rate)
is called the “spread”.
For a banker or authorised dealer whose business is to buy and sell currencies, the spread
has to necessarily exist, which indicates margin of profit that the banker or authorised
dealer makes in the exchange transaction.
Question 7
If the Two Way Direct Quote is $ 1 = ` 48 – ` 50.
How will you convert the same into a Two Way Indirect Quote?
Answer
This can be done by inverting the rates given in the direct quote. The inverse of ask rate
shall become bid rate and the inverse of bid rate shall become ask rate. Understand the
reasoning:
In the given direct quote, the banker is willing to buy $ 1at ` 48.
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Therefore, inverting this rate, ` 1 = $ 0.20833.
Therefore, it can be understood as the rate at which the banker is ready to sell `.
The Banker is ready to
If the Banker is ready
sell ` 1 for $ 1/48 or $
0.020833
to buy $ 1 for ` 48
Similarly,
In the given direct quote, the banker is willing to sell $ 1 at ` 50.
Therefore, inverting this rate, ` 1 = $ 0.02.
Therefore, it can be understood as the rate at which the banker is ready to buy `.
The Banker is ready to
If the Banker is ready
buy ` 1 for $ 1/50 or
$ 0.02
to sell $ 1 for ` 50
 ` 1 = $0.02 – $ 0.020833
Question 8
$/£ = 1.5
`/$ = 44
Calculate:
1. Amount of ` for £ 2,200
2. Amount of $ for ` 5,40,000
3. Amount of £ for $ 3,600
4. Amount of £ for ` 3,600
Question 9
$ 1 = ` 45 – ` 47
£ 1 = $ 1.52 – $ 1.60
Calculate:
1. Amount of `, required to buy £ 500
2. Amount of `, obtained by selling £ 500
Question 10
$/£ = 1.45 – 1.52
`/$ = 44.5 – 46.00
Calculate:
1. Amount of `, required to buy $ 1,000
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2. Amount of `, obtained by selling $ 1,000
3. Amount of £, required to buy ` 5,00,000
4. Amount of £, obtained by selling ` 5,00,000
5. Amount of $, required to buy ` 3,00,000
6. Amount of $, obtained by selling ` 3,00,000
8. Amount of `, obtained by selling £ 500
DIYA (Do It Yourself Activity)
Question 11
`/£ = 71.20 – 72.30
€/£ = 1.20 – 1.30
`/$ = 43.20 – 43.90
Calculate:
1. Amount of `, obtained by selling € 20,000
2.
3.
4.
5.
6.
Amount of `, required to buy € 22,000
Amount of $, required to buy £ 36,000
Amount of $, obtained by selling £ 32,000
Amount of $, required to buy € 26,000
Amount of $, obtained by selling € 30,000
Question 12
`/$ = 43.60 – 44.40
`/£ = 71.60 – 72.60
`/€ = 62.20 – 63.10
Calculate:
1. Amount of $, obtained by selling € 12,000
2. Amount of $, required to buy € 15,000
3. Amount of £, obtained by selling $ 20,000
4. Amount of £, required to buy $ 30,000
5. Amount of €, required to buy £ 1,00,000
6. Amount of €, obtained by selling £ 86,000
Question 13
$ 1 = ` 44.50 – ` 46.00
£ 1 = $ 1.45 – $ 1.52
$ 1 = ¥ 115.00 – ¥ 120.00
£ 1 = € 1.20 – € 1.25
Calculate:
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1. Amount of `, required to buy $ 1,000
3. Amount of `, required to buy ¥ 20,000
4.
5.
6.
7.
Amount of `, required to buy € 1,150
Amount of $, required to buy € 5,000
Amount of €, required to buy ¥ 60,000
Amount of £, required to buy ¥ 50,000
8. Amount of ¥, required to buy ` 60,000
Appreciation & Depreciation
Question 14
What do you mean by Spot Rate?
Answer
“The spot rate is the rate applicable for immediate settlement”.
The Spot Rate is the rate at which a currency can be bought or sold for immediate delivery
which is within two business days after the day of the trade.
In other words, it is the exchange rate applicable for an immediate settlement, i.e., the
exchange rate prevailing now.
Question 15
What do you mean by Forward Exchange Rate?
Answer
A forward exchange rate occurs when buyers and sellers of currencies agree to deliver the
currency at some future date. They agree to transact a specific amount of currency at a
specific rate at a specific future date. The forward exchange rate is set and agreed by the
parties and remains fixed for the contract period regardless of the fluctuations in the spot
exchange rates in future. The Forward Exchange Rate is the rate that is currently paid for
the delivery of the currency at some future date.
Question 16
What do you mean by Forward Exchange Contract?
Answer
These are contracts for purchase or sale or exchange of currencies at a future date for the
exchange rate agreed at present, for example, X Ltd. enters into a contract on 01.01.2010
for buying € 10,000 on 31.03.2010 at a contracted exchange rate of € 1 = ` 52. In this case,
the contract is a forward contract because it is to do something at a future date. As the
contract is for exchanging currencies at a future date it is a “Forward Exchange Contract”.
Forward contracts are tailor-made according to the firm’s needs. Two parties to a forward
contract can negotiate the terms in accordance with the currency, amount,
premium/discount or any other issue.
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Question 17
What do you mean by Appreciation and Depreciation in case of Currency?
Answer
Currency is said to have appreciated if its value has increased, i.e., an investor is required to
pay more for purchasing that currency. For Example, $ 1 = ` 40 becomes $ 1 = ` 42. Here, the
value of dollar has increased. An investor is required to pay more Rupees to acquire $ 1.
Currency is said to have depreciated if its value has decreased, i.e., an investor is required to
pay less for purchasing the currency. For Example, $ 1 = ` 41 becomes $ 1 = ` 39. Here, the
value of dollar has decreased. An investor is required to pay lesser amount in Rupees to
acquire $ 1.
A. In a direct quote, since the foreign currency is the commodity, if the forward rate is
greater than the spot rate, the foreign currency is appreciating and the home currency is
depreciating.
B. In a direct quote, if the forward rate is less than the spot rate, the foreign currency is
depreciating and the home currency is appreciating.
Relationship
F>S
F<S
Foreign Currency
Appreciating
Depreciating
Home Currency
Depreciating
Appreciating
To work on indirect quotes, convert them to direct quote and then apply the above
points.
Question 18
How do you compute Appreciation and Depreciation?
Answer
Appreciation or Depreciation of foreign currency under a direct quote:
(F – S)
S
(Positive indicates appreciation and negative indicates depreciation)
Appreciation/Depreciation =
Appreciation or Depreciation of local currency under a direct quote:
(F – S)
F
(Positive indicates depreciation and negative indicates appreciation)
Appreciation or Depreciation of foreign currency under an indirect quote:
(S – F)
F
(Positive indicates appreciation and negative indicates depreciation)
Appreciation or Depreciation of local currency under an indirect quote:
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(S – F)
S
(Positive indicates depreciation and negative indicates appreciation)
Where,
F = Forward Exchange Rate
S = Spot Exchange Rate
Question 19
Spot Rate is $ 1 = ` 40; 1 Year Forward Rate is $ 1 = ` 44
Determine which currency appreciates and which one depreciates.
Also determine the percentage of appreciation and depreciation.
Fair Forward Rate & Arbitrage
Example:
Spot rate: $ 1 = ` 46
Interest rate prevailing in India = 12%
Interest rate prevailing in US = 7%
Determine the Fair Forward Rate (1 Year)
Solution
US
India
$1
` 46
+ 7%
+ 12%
$ 1.07
` 51.52
After 1 year $ 1.07 should be equal to ` 51.52
$1=
51.52
= ` 48.15
1.07
By formula,
th
⸳㌳
th
Where,
FFR
= Fair Forward Rate
S
= Spot Rate
iL
= Interest rate (Local)
iF
= Interest Rate (Foreign Country)
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 Fair Forward Rate (1 Year) will be $ 1 = ` 48.15
What if the Actual Forward Rate is also same as the spot rate? i.e. $ 1 = ` 46
Any one will try to take advantage of the situation i.e.
“Borrow in US @ 7% p.a. & Invest in India @ 12% p.a.”
In other words one can make “Arbitrage Gain.”
The Arbitrage process will be as below:
` 46,00,000
+ 12%
$ 1,00,000
+ 7%
` 51,52,000
$ 1,07,000
(-) ` 49,22,000
$ 1,07,000
` 2,30,000
NIL
GAIN
Is it really Possible?
Not Possible
As the exchange rate will not be same
Question 20
Interest Rate prevailing in India
Interest Rate prevailing in UK
Exchange Rate at present
Determine:
 Fair Forward Price for 1 year.
 Fair Forward Price for 3 months.
Question 21
Interest Rate prevailing in US
13% p.a.
6% p.a.
£ 1 = ` 63
14% p.a.
8% p.a.
If Fair Forward Price after 1 year is $ 1 = ` 43.60, determine the following:
1. Spot Rate
2. Fair Forward Price after 3 months from now
Question 22
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Interest Rate Prevailing in India = 14% p.a.
Interest Rate prevailing in UK = 6% p.a.
Spot rate: £ 1= ` 70
Determine one year Fair Forward Rate between £ & `
Now, suppose the Actual Forward Rate is not matching with the Fair Forward Rate. Say the
Actual Forward Rate is quoted as: £ 1 = ` 74
Consider the Foreign currency amount of £ 1,00,000 and show how arbitrage gain can be
made. Also determine such Arbitrage gain.
Question 23
Given the following information:
Exchange rate – Canadian Dollar 0.665 per DM (spot)
Canadian dollar 0.670 per DM (3 months)
Interest rates – DM – 7% p.a.
Interest rates – Canada – 9% p.a.
What operations would be carried out to take the possible arbitrage gains? For this purpose
assume Canadian Dollar 1,000 and determine arbitrage gain.
(May 2006, 8 Marks)
Question 24
Spot rate 1 US $ = ` 48.0123
180 days Forward rate for 1 US $ = ` 48.8190
Annualized interest rate for 6 months – Rupee = 12%
Annualized interest rate for 6 months – US $ = 8%
Is there any arbitrage possibility? If yes how an arbitrageur can take advantage of the
situation, if he is willing to, borrow ` 40,00,000 or US $ 83,312.
(Nov. 2006, 4 Marks)
Question 25
On 1st April, 3 months interest rate in the US and Germany are 6.5 per cent and 4.5 per cent
per annum respectively. The $/DM spot rate is 0.6560. What would be the forward rate for
DM for delivery on 30th June?
(Nov 2002, 4 Marks)
Question 26
The United States Dollar is selling in India at ` 45.50. If the interest rate for a 6-months
borrowing in India is 8% per annum and the corresponding rate in USA is 2%.
1. Do you expect United States Dollar to be a premium or at discount in the Indian forward
market;
2. What is the expected 6-months forward rate for United States Dollar in India; and
3. What is the rate of forward premium or discount?
(May 2004, 4 Marks)
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Question 27
In International Monetary Market an international forward bid for December 15 on pound
sterling is $ 1.2816 at the same time that the price of IMM sterling future for delivery on
December, 15 is $ 1.2806. The contract size of pound sterling is £ 62,500. How could the
dealer use arbitrage in profit from this situation and how much profit is earned?
Spot Arbitrage & Net Position of Dealer
Question 28
You sold Hong Kong Dollar 1,00,00,000 value spot to your customer at ` 5.70 & covered
yourself in London market on the same day, when the exchange rates were:
US $ 1
= H.K.$
7.5880
7.5920
Local inter-bank market rates for US $ were:
Spot US $ 1
= `
42.70
42.85
Calculate cover rate & ascertain the profit or loss in the transaction. Ignore brokerage.
Question 29
Following are the spot exchange rates quoted at three different forex markets:
USD/INR
48.30 in Mumbai
GBP/INR
77.52 in London
GBP/USD
1.6231 in New York
The arbitrager has USD 1,00,00,000. Assuming that there are no transaction costs, explain
whether there is any arbitrage gain possible from the quoted spot exchange rates.
Question 30
You, a foreign exchange dealer of your bank, are informed that your bank has sold a T.T. on
Copenhagen for Danish Kroner 10,00,000 at the rate of Danish Kroner 1 = ` 6.5150. You are
required to cover the transaction either in London or New York market. The rates on that
date are as under:
Mumbai-London
` 74.3000
` 74.3200
Mumbai-New York
` 49.2500
` 49.2625
London-Copenhagen
DKK 11.4200
DKK 11.4350
New York-Copenhagen
DKK 07.5670
DKK 07.5840
In which market will you cover the transaction, London or New York, and what will be the
exchange profit or loss on the transaction? Ignore brokerages.
DIYA (Do It Yourself Activity)
Question 31
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The US dollar is selling in India at ` 55.50. If the interest rate for a 6 months borrowing in
India is 10% per annum and the corresponding rate in USA is 4%.
(i) Do you expect that US dollar will be at a premium or at discount in the Indian Forex
Market?
(ii) What will be the expected 6-months forward rate for US dollar in India? And
(iii) What will be the rate of forward premium or discount?
Question 32
Given the following information:
Exchange rate – Canadian Dollar 0.666 per DM (Spot)
Canadian Dollar 0.671 per DM (3 months)
Interest Rates – DM 8% p.a.
Canadian Dollar 10% p.a.
What operations would be carried out to earn the possible arbitrage gains?
Question 33
Spot Rate
Forward Rate for 1 year
$ 1 = ` 43.6
$ 1 = ` 47
12% p.a.
Required:
1. Determine Fair Rate of Interest prevailing in US.
2. Use the data given above and determine the strategies for arbitrage under the following
cases:
Case 1: Actual interest rate in US is 6%
Case 2: Actual interest rate in US is 3%
Question 34
The Bank sold Hong Kong Dollar 1,00,000 spot to its customer at ` 7.5681 and covered itself
in London market on the same day, when the exchange rates were:
US $1 = HK $8.4409 – HK $8.4500
Local inter-bank market rates for US$ were:
Spot US$1 = ` 62.7128 – ` 62.9624
Calculate the cover rate and ascertain the profit or loss in the transaction.
Ignore brokerage.
(May 2014, Marks 5)
Question 35
Edelweiss Bank Ltd. sold Hong Kong dollar 2 crores value spot to its customer at ` 8.025 and
covered itself in the London market on the same day. When the exchange rates were
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US$ = HK $ 7.5880 – 7.5920
Local interbank market rates for US $ were
Spot US $ 1 - ` 60.70 – 61.00
Calculate the cover rate and ascertain the profit or loss on the transaction.
Ignore brokerage.
(Nov. 2014, Marks 5)
Interest Rate Parity Theory
The interest rates prevailing in two countries shall be the basis for determining the Fair
Forward Price. The actual forward rate has to be same as Fair Forward Price. Otherwise,
Arbitrage Opportunity arises. Arbitrage means “making risk free gains”.
The theory believes that the exchange rate between the two currencies purely depend upon
the interest rates prevailing in the two respective countries.
For example, interest rate prevailing in India is 12% p.a. and that in US is 7% p.a., one would
try to take advantage of the given situation i.e. by borrowing in US at 7% p.a. and investing
in India at 12% p.a. thereby earning the net differential interest of 5% p.a., this is somehow
not that simple. In fact as per Interest Rate Parity Theory this is not possible. By the end of
the year the exchange rates between ` and $ would have changed adversely in such a way
that the interest differential so earned shall be compensated by the exchange loss arising on
repayment of US loan.
If Interest Rate Parity Theory does not hold good, it will give rise to possibility of arbitrage
i.e., making risk free assured gains. The moment arbitragers start using this opportunity for
arbitrage gain, the interest rates as well as exchange rates start fluctuating until the
equilibrium is achieved i.e., to say Interest Rate Parity Theory starts working.
Purchasing Power Parity Theory
This theory believes that the exchange rate between the two currencies is affected by the
inflation rates prevailing in the two respective countries. This theory also works in the same
manner as Interest Rate Parity Theory with the only difference that it uses inflation rates for
determining fair forward rate and not interest rates.
Interest Rate Parity Theory considers time value of money as the factor that affects
exchange rates whereas Purchasing Power Parity Theory considers purchasing power of
money as the factor that can influence the exchange rates.
Question 36
1. The rate of inflation in USA is likely to be 3% per annum and in India it is likely to be 6.5%.
The current spot rate of US $ in India is ` 43.40. Find the expected rate of US $ in India
after one year and 3 years from now using purchasing power parity theory.
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2. On April 1, 3 months interest rate in the UK £ and US $ are 7.5% and 3.5% per annum
respectively. The UK £/US $ spot rate is 0.7570. What would be the forward rate for US $
for delivery on 30th June?
Question 37
The rate of inflation in India is 8% per annum and in the U.S.A. it is 4%. The current spot rate
for USD in India is ` 46. What will be the expected rate after 1 year and after 4 years
applying the Purchasing Power Parity Theory?
(May 2010, 4 Marks)
Fisher’s Theory (International Fisher’s Effect)
This theory is modified version of Interest Rate Parity Theory. It considers that primary
factor that can influence the exchange rates is the interest rates prevailing in two respective
countries. However, purchasing power of money also has to be considered. In other words,
inflation rates prevailing in the two respective countries cannot be ignored. Therefore the
interest rate to be considered for determining fair forward rate should be inflation adjusted
interest rates. Interest Rate Parity Theory considers Real Interest Rates whereas Fisher’s
Theory considers Money Interest Rates.
MIR = (1 + RIR) (1 + IR) – 1
Where,
MIR = Money Interest Rate i.e., inflation adjusted interest rates
RIR = Real Interest Rate (Pure Interest Rate without effect of Inflation)
IR = Inflation Rate
End of Part 1
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Part 2 – Foreign Exchange Risk Management
There are various approaches for managing foreign Exchange Risk. These approaches are
Approach 1: No Hedging
Approach 2: Invoicing in Local Currency
Approach 3: Leading and Lagging
Approach 4: Forward Exchange Contract (Without Options)
A. Honouring the contract on Maturity
B. Honouring the contract before Maturity
C. Roll-over of the contract on Maturity
D. Roll-over of the contract before Maturity
E. Cancellation of contract on Maturity
F. Cancellation of contract before Maturity
Approach 5: Forward Exchange Contract (With Options)
Approach 6: Netting & Money Market Hedge
Approach 7: Currency Futures (Covered with Derivatives)
Approach 8: Currency Options (Covered with Derivatives)
Approach 9: Currency Swaps (Covered with Derivatives)
Hedging through Forward Exchange Contracts
Question 38
X Ltd. purchased goods for 3 months credit on 01.07.2010. The invoice value was $ 10,000.
Spot Rate on 01.07.2010 was $ = ` 42. On the same date X Ltd. entered into a Forward
Exchange contract to buy $ 10,000 after 3 months. The contracted forward rate was $ 1 = `
42.5
Determine the net gain/(loss) for X Ltd. if it honours the contract on maturity under the
following cases:
Case 1: Spot Rate on 30.09.2010 was: $ 1 = ` 42
Case 2: Spot Rate on 30.09.2010 was: $ 1 = ` 44
Question 39
Refer the data in Question 38 and assume that the spot rate on 30.09.2010 is $ 1 = ` 40.
What will be the amount of loss on honouring the contract? If the penalty for cancellation of
contract is ` 18,000, would you advice to cancel the contract or honour the contract?
Question 40
A company is considering hedging its foreign exchange risk. It has made a purchase on 1st
January, 2008 for which it has to make a payment of US $ 50,000 on September 30, 2008.
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The present exchange rate is 1 US $ = ` 40. It can purchase forward 1 US $ at ` 39. The
company will have to make an upfront premium of 2% of the forward amount purchased.
The cost of funds to the company is 10% per annum and the rate of corporate tax is 50%.
Ignore taxation. Consider the following situations and compute the Profit/Loss the company
will make if it hedges its foreign exchange risk:
1. If the exchange rate on September 30, 2008 is ` 42 per US $.
2. If the exchange rate on September 30, 2008 is ` 38 per US $.
(May 2008, 8 Marks)
Question 41
Foreign Currency Receivable
$ 1,00,000
Expected Date of Receipt
31.03.2010
Today, i.e., on 01.01.2010, company enters into a Forward Exchange Contract to sell $ on
31.03.2010 at Forward Rate of $ 1 = ` 44.60 – ` 45.20.
On 01.03.2010, the customer settles the entire outstanding of $ 1,00,000. Spot Rate on
01.03.2010 is $ 1 = ` 44.10 – ` 44.60
On 01.03.2010 Forward rate available for 30 days is $ 1 = ` 43.60 – ` 44.20.
Spot rate on 31.03.2010 was $ 1 = ` 43.60 – ` 44.30
You are required to determine the following:
1. Total amount of Indian Rupee invoice value if spot rate on the date of sale was $ 1 = `
45.00 – ` 45.40.
2. The total amount of premium or discount arising because of entering into the Forward
Exchange Contract on 01.01.2010.
3. Additional cost on settling the contract 30 days prior to maturity.
4. The position of the company if no Forward Cover was taken.
Question 42
On 01.10.2009 X Ltd sold goods to a dealer in UK for 6 months credit. Exchange rate on this
date was € 1 = ` 52.00 – ` 52.50
Foreign Currency Receivable
Expected Date of Receipt
€ 2,00,000
31.03.2010
On 01.10.2009, company enters into a Forward Exchange Contract to sell € on 31.03.2010 at
Forward Rate of € 1 = ` 51.60 – ` 52.20.
On 31.12.2009, the customer is willing to lead the payment and settles the entire
outstanding of € 2,00,000. Spot Rate on 31.12.2009 is € 1 = ` 51.25 – ` 51.80 and on the
same date the forward rate available for 3 months is € 1 = ` 51.00 – ` 51.30
114
You are required to determine the additional cost on settling the contract 3 months prior to
maturity.
Question 43
X Ltd. purchased an asset for $ 1,00,000 on 01.10.2009. The exchange rate on that date is $
1 = ` 44 – ` 44.60. The amount was to be settled after 3 months i.e., on 31.12.2009. On
01.10.2009 the forward rate available for $ 1 = ` 44.00 – ` 45.00 for 3 months. X Ltd. entered
into this forward exchange contract.
On 31.12.2009. X Ltd. is unable to honour the contract and requires an extension for 2
months and expected date of settlement shall be 28.02.2010. The spot rate on 31.12.2009
was $ 1 = ` 44.60 – ` 45.30 and on the same date the forward rate available for 2 months
was $ 1 = ` 45.00 – ` 45.70. X Ltd. decides to rollover this forward exchange contract on
31.12.2009.
Determine the following:
1. Action to be taken on 31.12.2009
2. Net additional cost for rollover
Question 44
X Ltd. purchased an asset for $ 1,00,000 on 01.10.2009. The exchange rate on that date is $
1 = ` 44 – ` 44.60. The amount was to be settled after 3 months i.e., on 31.12.2009. On
01.10.2009 the forward rate available for $ 1 = ` 44.00 – ` 45.00 for 3 months. X Ltd. entered
into this forward exchange contract.
As on 01.12.2009, X Ltd. is aware of the fact that it will be unable to make the payment on
31.12.2009 and requires an extension for 2 months and expected date of settlement shall
be 28.02.2010. Therefore, plans for rollover of original contract on 01.12.2009.
The forward rate available for 1 month on 01.12.2009 is $ 1 = ` 44.70 – ` 45.50 and forward
rate available for 3 months is $ 1 = ` 45.20 – ` 45.90.
Determine the following:
1. Action to be taken on 1.12.2009
2. Net additional cost for rollover
Question 45
A customer with whom the Bank had entered into 3 months forward purchase contract for
Swiss Francs 10,000 at the rate of ` 27.25 comes to the bank after 2 months and requests
cancellation of the contract. On this date, the rates, prevailing, are:
Spot
CHF 1 = ` 27.30
` 27.35
One month forward
CHF 1 = ` 27.45
` 27.52
115
What is the loss/gain to the customer on cancellation?
(May 2002, 6 Marks)
Question 46
ABC Co. has taken a 6 months loan from their foreign collaborators for US Dollars 2 millions.
Interest payable on maturity is at LIBOR plus 1.0%. Current 6-month LIBOR is 2%.
Enquiries regarding exchange rates with their bank elicit the following information:
Spot USD 1
` 48.5275
6 months forward
` 48.4575
1. What would be their total commitment in Rupees, if they enter into a forward contract?
2. Will you advise them to do so? Explain giving reasons.
(Nov. 2003, 10 Marks)
Question 47
In March, 2003, Multinational Industries makes the following assessment of dollar rates per
British pound to prevail as on 1.9.2003:
$/Pound
Probability
1.60
0.15
1.70
0.20
1.80
0.25
1.90
0.20
2.00
0.20
1. What is the expected spot rate for 1.9.2003?
2. If, as of March, 2003, the 6-months forward rate is $ 1.80, should the firm sell forward
its pound receivables due in September, 2003?
(May 2003, 6 Marks)
Question 48
Excel Exporters are holding an Export bill in United States Dollar (USD) 1,00,000 due 60 days
hence. They are worried about the falling USD value which is currently at ` 45.60 per USD.
The concerned Export Consignment has been priced on an Exchange rate of ` 45.50 per USD.
The firm’s Bankers have quoted a 60-day forward rate of ` 45.20. Calculate:
1. Rate of discount quoted by the Bank
2. The probable loss of operating profit if the forward sale is agreed to.
Question 49
A company operating in Japan has affected sales to an Indian company the payment being
due 3 months from the date of invoice. The invoice amount is 108 lakhs yen. At today’s spot
rate, it is equivalent to ` 30 lakhs. It is anticipated that the exchange rate will decline by 10%
over the 3 months period and in order to protect the yen payments, the importer proposes
to take appropriate action in the foreign exchange market. The 3 months forward rate is
presently quoted as 3.3 yen per rupee. You are required to calculate the expected loss and
to show how it can be hedged by a forward contract.
116
(Nov 2003, 6 Marks)
Question 50
JKL Ltd., an Indian company has an export exposure of JPY 10,000,000 payable August 31,
2014. Japanese Yen (JPY) is not directly quoted against Indian Rupee.
The current spot rates are:
INR/US $
JPY/US$
=
=
` 62.22
JPY 102.34
It is estimated that Japanese Yen will depreciate to 124 level and Indian Rupee to depreciate
against US $ to ` 65.
Forward rates for August 2014 are
INR/US $
=
` 66.50
JPY/US$
=
JPY 110.35
Required:
1. Calculate the expected loss, if the hedging is not done. How the position will change, if
the firm takes forward cover?
2. If the spot rates on August 31, 2014 are:
INR/US $
=
` 66.25
JPY/US$
=
JPY 110.85
Is the decision to take forward cover justified?
Question 51
Following information relates to AKC Ltd. which manufactures some parts of an electronics
device which are exported to USA, Japan and Europe on 90 days credit terms.
Cost and sales information:
Japan
Variable cost per unit
` 225
Export sale price per unit
Yen 650
Receipt from sale due in 90
Yen 78,00,000
days
Foreign exchange rate information:
USA
Europe
` 395
US$ 10.23
` 510
Euro 11.99
US $ 1,02,300
Euro 95,920
Yen/`
US $/`
Euro/`
Spot market
2.417-2.437
0.0214-0.0217
0.0177-0.0180
3 months forward
2.397-2.427
0.0213-0.0216
0.0176-0.0178
3 months spot
2.423-2.459
0.02144-0.02156
0.0177-0.0179
Advice AKC Ltd. by calculating average contribution to sales ratio whether it should hedge
it’s foreign currency risk or not.
Hedging through Money Market Operations
117
(Money Market Hedge)
Question 52
Goods sold on credit on 01.01.2011 for 3 months
Spot Rate
3 months forward rate available
$ 1,00,000
$ 1 = ` 43.80 – ` 44.40
$ 1 = ` 44.20 – ` 44.90
9% p.a to 12% p.a.
6% p.a to 8% p.a.
Interest rate in India
Interest rate in US
Explain the course of action that the company can adopt for hedging the risk of foreign
exchange in the given case.
Question 53
An exporter is a UK based company. Invoice amount is $ 3,50,000. Credit period is three
months.
Exchange rates in London are:
Spot Rate
($/£) 1.5865 – 1.5905
3 – month Forward Rate
($/£) 1.6100 – 1.6140
Rates of interest in Money Market:
Deposit
Loan
$
7%
9%
£
5%
8%
Compute and show how a money market hedge can be put in place. Compare and contrast
the outcome with a forward contract.
Question 54
An Indian exporting firm, Rohit and Bros., would be covering itself against a likely
depreciation of pound sterling. The following data is given:
Receivables of Rohit and Bros
Spot rate
Payment date
3 months interest rate
What should the exporter do?
:
:
:
:
:
£ 5,00,000
` 56.00/£
3-months
India: 12 per cent per annum
UK: 5 per cent per annum
Leading & Lagging
Question 55
Z Ltd. importing goods worth USD 2 million requires 90 days to make the payment. The
overseas supplier has offered a 60 days interest free credit period and for additional credit
for 30 days as interest of 8% per annum.
118
The bankers of Z Ltd. offer a 30 days loan at 10% per annum and their quote for foreign
exchange is as follows:
Spot 1 USD
60 days forward for 1 USD
90 days forward for 1 USD
–
–
–
`
56.50
57.10
57.50
You are required to evaluate the following options:
1. Pay the supplier in 60 days, or
2. Avail the supplier’s offer of 90 days credit.
Question 56
An Indian importer has to settle an import bill for $1,30,000. The exporter has given the
Indian exporter two options:
(i) Pay immediately without any interest charges.
(ii) Pay after three months with interest at 5 percent per annum.
The importer’s bank charges 15 percent per annum on overdrafts. The exchange rates in the
market are as follows:
: 48.35/48.36
Spot rate (`/$)
3-Months forward rate (`/$) : 48.81/48.83
The importer seeks your advice. Give your advice.
Question 57
The following 2-way quotes appear in the foreign exchange market:
Spot
2-months forward
RS/US $
` 46.00/` 46.25
` 47.00/` 47.50
Required:
1. How many US dollars should a firm sell to get ` 25 lakhs after 2 months?
2. How many Rupees is the firm required to pay to obtain US $ 2,00,000 in the spot market?
3. Assume the firm has US $ 69,000 in current account earning no interest. ROI on Rupee
investment is 10% p.a. should the firm encash the US $ now or 2 months later?
Question 58
AMK Ltd. an Indian based company has subsidiaries in U.S. and U.K. forecasts of surplus
funds for the next 30 days from two subsidiaries are as below:
U.S.
$ 12.5 million
U.K.
£ 6 million
119
Following exchange rate information are obtained.
Spot
30
forward
days
$/`
0.0215
£/`
0.0149
0.0217
0.0150
Annual borrowing/deposit rates (simple) are available.
6.4%/6.2%
`
$
1.6%/1.5%
£
3.9%/3.7%
The Indian operation is forecasting a cash deficit of ` 500 million.
It is assumed that interest rates are based on a year of 360 days
1. Calculate the cash balance at the end of 30 days period in ` for each company under
each of the following scenarios ignoring transaction costs and taxes.
a. Each company invests/finances its own cash balances/deficits in local currency
independently.
b. Cash balances are pooled immediately in India and the net balances are
invested/borrowed for the 30 days period.
2. Which method do you think is preferable from the parent company’s point of view?
(May 2007, 8 Marks)
Question 59
DEF Ltd. has imported goods to the extent of US$ 1 crore. The payment terms are 60 days
interest free credit. For additional credit of 30 days, interest at the rate of 7.75% p.a. will be
charged.
The banker of DEF Ltd. has offered a 30 days loan at the rate of 19.5% p.a. Their quote for
the foreign exchange is as follows:
Spot rate INR/US$
` 62.50
60 days forward rate INR/US$
` 63.15
90 days forward rate INR/US$
` 63.45
Which one of the following options would be better?
(i) Pay the supplier on 60th day and avail bank loan for 30 days
(ii) Avail the supplier’s offer of 90 days credit
(May 2015, Marks 5)
Application of Forward Points or Swap Points
Question 60
You have following quotes from Bank A and Bank B:
Bank A
Spot
USD/CHF 1.4650/55
120
Bank B
USD/CHF 1.4653/60
3 months
6 months
5/10
10/15
GBP/USD 1.7645/60
Spot
3 months
6 months
GBP/USD 1.7640/50
25/20
35/25
Calculate:
1. How much minimum CHF amount you have to pay for 1 Million GBP spot?
2. Considering the quotes from Bank A only, for GBP/CHF what are the Implied Swap points
for Spot over 3 months?
(June 2009, 6 Marks)
Question 61
Gibralater Limited has imported 5000 bottles of shampoo at landed cost in Mumbai, of US $
20 each. The company has the choice for paying for the goods immediately or in 3 moths
time. It has a clean overdraft limited where 14% p.a. rate of interest is charged.
Calculate which of the following method would be cheaper to Gibralter Limited.
(i) Pay in 3 months time with interest @ 10% and cover risk forward for 3 months.
(ii) Settle now at a current spot rate and pay interest of the overdraft for 3 months.
The rates are as follow:
Mumbai `/$ spot
3 months swap
:
:
60.25 – 60.55
35/25
Part 3 – Forex Miscellaneous
(Nov. 2014, Marks 8)
Question 62
Sun Ltd. in planning to import equipment from Japan at a cost of 3,400 lakh yen. The
company may avail loans at 18 per cent per annum with quarterly rests with which it can
import the equipment. The company has also an offer from Osaka branch of an India based
bank extending credit of 180 days at 2 per cent per annum against opening of an irrevocable
letter of credit.
Additional information:
Present exchange rate ` 100 = 340 yen
180 day’s forward rate ` 100 = 345 yen
Commission charges for letter of credit at 2 per cent 12 months.
Advise the company whether the offer from the foreign branch should be accepted.
Question 63
Your forex dealer had entered into a cross currency deal and had sold US $ 10,00,000
against Euro at US $ 1 = EUR 1.4400 for spot delivery.
However, later during the day, the market became volatile and the dealer in compliance
with his management’s guidelines had to square – up the position when the quotations
were:
121
Spot US $ 1
INR 31.4300/4500
1 month margin
25/20
2 months margin
45/35
Spot US $ 1 EURO
1.4400/4450
1 month forward
1.4425/4490
2 months forward
1.4460/4530
What will be the gain or loss in the transaction?
(June 2009, 6 Marks)
Question 64
On January 28, 2013 an importer customer requested a Bank to remit Singapore Dollar (SGD)
2,500,000 under an irrevocable Letter of Credit (LC). However, due to unavoidable factors,
the Bank could effect the remittances only on February 4, 2013. The inter-bank market rates
were as follows:
January 28, 2013
February 4, 2013
US$ 1=
` 45.85/45.90
` 45.91/45.97
GBP £ 1=
GBP £ 1=
US$ 1.7840/1.7850
SGD 3.1575/3.1590
US$ 1.7765/1.7775
SGD 3. 1380/3.1390
The Bank wishes to retain an exchange margin of 0.125%
Required:
How much does the customer stand to gain or lose due to the delay?
(Note: Calculate the rate in multiples of 0.0001)
(May 2014, 8 Marks)
Question 65
The price of a bond just before a year of maturity is $5,000. Its redemption value is $5,250
at the end of the said period. Interest is $350 p.a. The Dollar appreciates by 2% during the
said period. Calculate the rate of return.
(May 2012, 5 Marks)
Question 66
M/S Omega Electronic Ltd. exports air conditioners to Germany by importing all the
components from Singapore. The company is exporting 2,400 units at a price of Euro 500
per unit. The cost of imported components is S$800 per unit. The fixed cost and other
variables cost per unit are ` 1,000 and ` 1,500 respectively. The cash flows in foreign
currencies are due in six months. The current exchange rates are as follows:
51.50/55
`/Euro
`/S$
27.20/25
After six months the exchange rates turn out as follows:
52.00/05
`/Euro
`/S$
27.70/75
122
1... You are required to calculate loss/gain due to transaction exposure.
2... Based on the following additional information calculate the loss/gain due to transaction
and operating exposure if the contracted price of air conditioners is ` 25,000
(i) The current exchange rate changes to
51.75/80
`/Euro
27.10/15
`/S$
(ii) Price elasticity of demand is estimated to be 1.5
(iii) Payments and receipts are to be settled at the end of six months.
(Nov. 2009, 12 Marks)
Question 67
Your bank’s London office has surplus funds to the extent of USD 5,00,000/- for a period of
3 months. The cost of the funds to the bank is 4% p.a. It proposes to invest these funds in
London, New York or Frankfurt and obtain the best yield, without any exchange risk to the
bank. The following rates of interest are available at the three centres for investment of
domestic funds there at for a period of 3 months.
London
5% p.a.
New York
8% p.a.
Frankfurt
3% p.a.
The market rate in London for US dollars and Euro are as under:
London on New York
Spot
1.5350/90
1 month
15/18
2 month
30/35
3 months
80/85
London on Frankfurt
Spot
1.8260/90
1 month
60/55
2 month
95/90
3 month
145/140
At which centre, will be investment be made & what will be the net gain (to the nearest
pound) to the bank on the invested funds?
Question 68
An importer is due to pay the exporter on 28th January 2010, Singapore Dollars of 25,00,000
under an irrevocable letter of credit. It directed the bank to pay the amount on the due date.
Due to go-slow and strike procedures adopted by its staff, the bank was not in a position to
remit the amount due. The amount was actually remitted on 4th February 2010. On the
transaction, the bank wants to retain an exchange margin of 0.125 per cent. The following
were the rates prevalent in the exchange market on the relevant dates:
28th January
4th February
Rupee/US $1
` 45.85 / 45.90
` 45.91 / 45.97
123
London Pound/Dollars
$1.7840 / 1.7850
$ 1.7765 / 1.7775
Pound
Sing $ 3.1575 / 3.1590
Sing $ 3.1380 / 3.1390
What is the effect on account of the delay in remittance? Calculate rate in multiples of
0.0001.
(Nov. 2011, 5 Marks & May 2005, 8 Marks)
Part 4 – Foreign Direct Investments (FDI)
Question 69
Risk free rate prevailing:
In India = 12% p.a.
In USA = 6% p.a.
An Indian company initiates a project in US for which the appropriate discounting rate i.e.,
Risk Adjusted Discounting Rate (RADR) in India is 15% p.a. You are required to determine
the corresponding RADR for the same project in US.
Question 70
Refer to the data given in Question 69. Assume that spot rate is $ 1 = ` 50. Using risk free
rates prevailing in India and US, determine Fair Forward Rate. Also determine the present
value of $ 100 receivable after 1 year, using:
1. Local Currency Approach
2. Foreign Currency Approach
Question 71
Refer to the data given in Question 69 and 70. Consider following additional information:
Cost of project in US = $ 80,000
Life of Project with zero scrap value – 3 years
Annual Cashflow = $ 40,000 p.a.
You are required to determine the net present value of the project, using:
1. Local Currency Approach
2. Foreign Currency Approach
Question 72
ABC Ltd. is considering a project in US, which will involve an initial investment of US $
1,10,00,000. The project will have 5 years of life. Current spot exchange rate is ` 48 per US $.
The risk free rate in US is 8% and the same in India is 12%. Cash inflows from the project are
as follows:
Year
1
2
3
4
Cash inflow
US $ 20,00,000
US $ 25,00,000
US $ 30,00,000
US $ 40,00,000
124
5
US $ 50,00,000
Required rate of return on this project is 14%. Calculate the NPV of the project using:
Foreign currency approach & Local currency approach
(Nov. 2006, 5 + 5 Marks)
Question 73
XY Limited is engaged in large retail business in India. It is contemplating for expansion into
a country of Africa by acquiring a group of stores having the same line of operation as that
of India. The exchange rate for the currency of the proposed African country is extremely
volatile. Rate of inflation is presently 40% a year. Inflation in India is currently 10% a year.
Management of XY Limited expects these rates likely to continue for the foreseeable future.
Estimated projected cash flows, in real terms, in India as well as African country for the first
three years of the project are as follows:
Year – 0
Year – 1
Year – 2
Year - 3
Cashflows in Indian
-50,000
-1,500
-2,000
-2,500
Cash flows in African
Rands (‘000)
-2,00,000
+50,000
+70,000
+90,000
` (‘000)
XY Ltd. assumes the year 3 nominal cash flows will continue to be earned each year
indefinitely. It evaluates all investments using nominal cash flows and a nominal discounting
rate. The present exchange rate is African Rand 6 to ` 1.
You are required to calculate the net present value of the proposed investment considering
the following:
(i) African Rand cash flows are converted into rupees and discounted at a risk adjusted rate.
(ii) All cash flows for these projects will be discounted at a rate of 20% to reflect it’s high
risk.
(iii) Ignore taxation.
PVIF @ 20%
Year - 1
Year - 2
Year - 3
.833
.694
.579
(May 2013, 10 Marks)
Question 74
A multinational company is planning to set up a subsidiary company in India (where hitherto
it was exporting) in view of growing demand for its product and competition from other
MNCs. The initial project cost (consisting of Plant and Machinery including installation) is
estimated to be US$ 500 million. The net working capital requirements are estimated at US$
50 million. The company follows straight line method of depreciation. Presently, the
company is exporting two million units every year at a unit price of US$ 80, its variable cost
per unit being US$ 40.
The Chief Financial Officer has estimated the following operating cost and other data in
respect of proposed project:
125
(i) Variable operating cost will be US $ 20 per unit of production;
(ii) Additional cash fixed cost will be US $ 30 million p.a. and project's share of allocated
fixed cost will be US $ 3 million p.a. based on principle of ability to share;
(iii) Production capacity of the proposed project in India will be 5 million units;
(iv) Expected useful life of the proposed plant is five years with no salvage value;
(v) Existing working capital investment for production & sale of two million units through
exports was US $ 15 million;
(vi) Export of the product in the coming year will decrease to 1.5 million units in case the
company does not open subsidiary company in India, in view of the presence of
competing MNCs that are in the process of setting up their subsidiaries in India;
(vii) Applicable Corporate Income Tax rate is 35%, and
(viii) Required rate of return for such project is 12%.
Assuming that there will be no variation in the exchange rate of two currencies and all
profits will be repatriated, as there will be no withholding tax, estimate Net Present Value
(NPV) of the proposed project in India.
Present Value Interest Factors (PVIF) @ 12% for five years are as below:
Year
1
2
3
4
5
PVIF
0.8929
0.7972
0.7118
0.6355
0.5674
(May 2014, 10 Marks)
Question 75
A USA based company is planning to set up a software development unit in India. Software
development at the Indian unit will be bought back by the US parent at a transfer price of
US $ 10 million. The unit will remain in existence in India for one year; the software is
expected to get developed within this time frame.
The US based company will be subject to corporate tax of 30 per cent and a withholding tax
of 10 per cent in India and will not be eligible for tax credit in the US. The software
developed will be sold in the US market for US $ 12.0 million. Other estimates are as follows:
Rent for fully furnished unit with necessary hardware in India
Man power cost
(80 software professional will be working for 10 hours each day)
` 15,00,000
` 400 per man hour
` 12,00,000
Administrative and other costs
Advise the U.S. Company of financial viability of the project. The rupee-dollar rate is ` 48/$.
Part 5 – Forex Practice Questions
Question 76
126
An importer booked a forward contract with his bank on 10th April for USD 2,00,000 due on
10th June @ ` 64.4000. The bank covered its position in the market at ` 64.2800.
The exchange rates for dollar in the interbank market on 10th June and 20th June were:
10th June
20th June
Spot USD 1 =
` 63.8000/8200
` 63.6800/7200
Spot :
June
July
August
September
` 63.9200/9500
` 63.8000/8500
` 64.0500/0900
` 63.9300/9900
` 64.3000/3500
` 64.1800/2500
` 64.6000/6600
` 64.4800/5600
Exchange Margin 0.10% and interest on outlay of funds @ 12%. The importer requested on
20th June for extension of contract with due date on 10th August. Rates rounded to 4 decimal
in multiples of 0.0025. On 10th June, Bank Swaps by selling spot and buying one month
forward.
Calculate:
(i) Cancellation rate
(ii) Amount payable on $ 2,00,000
(iii) Swap loss
(iv) Interest on outlay of funds, if any
(v) New contract rate
(vi) Total Cost
(May 2015, Marks 9)
Question 77
The Bank sold Hong Kong Dollar 1,00,000 spot to its customer at ` 7.5681 and covered itself
in London market on the same day, when the exchange rates were
US $1 = HK $8.4409 – HK $8.4500
Local inter-bank market rates for US$ were:
Spot US$1 = ` 62.7128 – ` 62.9624
Calculate the cover rate and ascertain the profit or loss in the transaction.
Ignore brokerage.
(May 2014, Marks 5)
Question 78
An importer requests his bank to extend the forward contract for US$ 20,000 which is due
for maturity on 30th October, 2010, for a further period of 3 months. He agrees to pay the
required margin money for such extension of the contract.
Contracted Rate – US$ 1 = ` 42.32
The US Dollar quoted on 30-10-2010:Spot – 41.5000/41.5200
127
3 months’ Premium -0.87% /0.93%
Margin money for buying and selling rate is 0.075% and 0.20% respectively.
Compute:
1. The cost to the importer in respect of the extension of the forward contract, and
2. The rate of new forward contract.
End of International Finance
128

2016 Chapter 6 - International Finance

Transcription

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