Foreign exchange risk management

Q1

Indirect quotes from direct quotes in India
i.

Rs 45 / $
= $

ii.

1

/ Re
45

= £

= $ 0.022222 / Re
v. Rs 7.25 / FF
= FF

1
7.25

Q2

1
80

= DM

/ Re

= £ 0.0125 / Re
vi.

Rs 108 / €
=€

/ Re

= FF 0.1379310/Re

iii. Rs 25 / DM

Rs 80 / £

1

= ¥

= € 0.009259 / Re

25

/ Re

= DM 0.04 / Re

vii.

/ Re

108

1

iv. Rs 35 / S $
= S$

1
35

/ Re

= S$ 0.028571/Re

Rs 0.44 / ¥
1
0.44

/ Re

= 2.272727 / Re

Direct quotes ion US from following indirect quotes
i. Can $ 1.106 /$
= $

1
1.106

/ can

ii.

£ 0.61995 / $
=$

1
0.61995

iii. € 0.70744 / $
=$

1
0.70744

/€

iv
= $

DM 1.9875 / $
1
1.9875

/ DM

$
= $ 1.613033 / £
= $ 0.904159 /can$
v. AUS $ 1.10782/$
=$

1
1.10782

/ AUS $

= $ 0.902674/AUS$

vi. ¥ 90.225 / $
=$

1
90.225

= $ 0.0110834 / ¥

= $ 1.413547 / €

= $ 0.503144 / DM

Q3

Inverse of the given quotes

i. Rs 46.30/ 46.90 per $
= Rs

1
46.90

/

1
46.30

ii. Rs 78.45 / 79.10 per £

per $

= Rs 0.021322 / 0.021598 per $

iii.

Rs 63 / 65 per €

=

1

1

/

65

63

=€

=

€ 0.015385 / 0.015873 per Re

v.

FF 6.1563 / 6.4210 per $

=

$

=

1
6.4210

1

/

6.1563

per FF

$ 0.155739 / 0.162435 per FF

vii.

Roubles 250 / 255 per $

=

$

=

1

/

1

255 250

per Rouble

$ 0.003922 / 0.004 per Rouble

1

/

79.10 78.45

per Re

= £ 0.012642 / 0.012747 per Re

iv.

per Re

1

$ 1.4236 / 1.6512 per €
1

1

/

per $
1.6512 1.4236
= € 0.605620 / 0.702445 per $

vi.

¥ 675 / 710 per £

=

£

1

/

1

710 675

¥

= £ 0.001408 / 0.0014815 per ¥

viii. $ 0.1086 / 0.1104 per 100 ¥
=

¥

100
0.1104

/

100
0.1086

$

= ¥ 905.7971 / 920.8103 per $

Q4

a.

Rs 42.50 per $
$ 1.0563 per £

Direct quote in India i.e 𝑅𝑠 𝑅𝑠

$
£

=

$

x

£
= 42.50 x 1.0563

= Rs 44.89275 per £

b.

¥ 180.80 per $
£ 0.3264 per $

Indirect quote in UK
¥
¥
i.e
=
£
$

x

$
£

= 180.80 x 0.3264
= ¥ 59.01312 per £

c.

€ 0.9033 per $
£ 0.6437 per $
¥ 180.75 per £
¥

.

=

¥
£

x

£
$

d.

¥ 180.80 / 181.30 per £
Direct quote in Japan i.e

x

$

¥ 𝐷𝐸𝑀

= 180.75 x 0.6437 x

1

=180.80 x

£
£

Direct quote in UK =

$

£

x 𝐷𝐸𝑀
/ 181.30 x

1
3.5250

= £ 0.6125 per $

$
£

1

¥
£

= ¥ 51.283506 / 51.432624 DEM

£ 0.6125 per $
DM 1.3275 per $
¥ 108 per $

£

=

3.5255

0.9033

= 128.804135 per €

e.

DEM 3.5250 / 3.5255 per £

£

= 𝐷𝑀

, 𝐷𝑀 , ¥

£
$

x

$ 𝐷𝑀

1

= 0.6125 x 1.3275
= £ 0.461394 / DM

£

=

¥

£
$

x

$
¥

1

= 0.6125 x 108
= £ 0.005671 per ¥

$

=

£

=
$

Direct quote in USA =

$
£

$

$

, 𝐷𝑀 , ¥ 𝐷𝑀

=
=

$
¥

=
=

1
0.6125

$ 1.632653 per £
1
1.3275

$ 0.753296 per DM
1
108

$ 0.009259 per ¥

Contd: 𝐷𝑀

£

= 𝐷𝑀

$

$

1

x £ = 1.3275 x 0.6125
= DM 2.167347 per £ 𝐷𝑀 𝐷𝑀

Direct quote in Germany =

£

, 𝐷𝑀

$

,

= 1.3275

$ 𝐷𝑀

= DM 1.3275 per $

¥ 𝐷𝑀

=

¥ 𝐷𝑀

x

$

$
¥

= 1.3275 x

1
108

= DM 0.0122917 per ¥

¥

Direct quote in Japan =

¥
£

¥

¥

¥

, $ , 𝐷𝑀

$

¥

Given

£ 𝐷𝐸𝑀

$

x

$
£

1
0.6125

=

108 x

=

¥ 176.326531

=

108

=

¥ 108 per $
¥

= 𝐷𝑀

f.

¥

=

£

$

x

$ 𝐷𝑀

1

=

108 x

=

¥ 81.355932 per DM

1.3275

Rs 42.30 / 43.80 per $
Rs 80.50 / 82.20 per £
$ 1.124 / 1.136 per €
DM 6.243 / 6.725 per €

=
=
=

£ 𝑅𝑠

1
82.20

x 𝑅𝑠

$

x

$

x

x 42.30 x 1.124 x

€ 𝐷𝐸𝑀

1
6.725

£ 0.086009 / 0.09906 per DM

/

1
80.50

x 43.80 x 1.136 x

1
6.243

Q5

Given Spot rate
3 Month Forward

Rs 46.30 per $
Rs 46.95 per $

Annualised Premium or discount on $ 𝐹

; 𝑆 𝑆

=
=

Premium on $

= 5.616 % p.a 𝐹
; 𝑆 𝑆

Discount on Re

x 12

3

46.30 ; 46.95
46.95

=

Given Spot rate

x 12

3

Annualised Premium or Discount on Re =

Q6
.

x 12

3
46.95 ; 46.30
46.30

3

=

x 12

5.538 % p.a

Rs 50 per $

3 Month Forward if
a. Annual premium on $ is 20% 𝐹
; 𝑆 𝑆

x 12 = 0.20

3 𝐹
; 50
50

3

c. Annual premium on Re is 20%
=
=

x 12 = 0.20

3
50 ; 𝐹 𝐹

3 𝐹

; 𝑆 𝑆

3

x 12 = 0.20

F = 47.619
3 month forward rate Rs 47.619 per $

x12 = - 0.10 𝐹

; 50
50

x 12 = 0.20

F = 52.5
Rs 52.5 per $ 𝑆

; 𝐹 𝐹

b. Annual Discount on $ is 10%

3

x 12 = - 0.10

F = Rs 48.75 per $

d. Annual discount on Re 10%
=
= 𝑆

; 𝐹 𝐹

3

x 12 = - 0.10

50 ; 𝐹 𝐹

3

x 12 = - 0.10

50 – F = - 0.025
F = Rs 50.25 / $

Q7
Given

Spot rate

$ 1.3078 per £
€ 0.8075 per £

a. 3 month forward rate if annualized premium on $ is 3.75% 𝑆
; 𝐹 𝐹

3

x 12 = 0.0375

1.3078 ; 𝐹 𝐹

3

x 12 = 0.0375

1.3078 ; 𝐹 𝐹

=

0.0375
4

1.3078 – F
= 0.009375 F
F
= 1.295653
3 Month forward rate = $ 1.295653 per £
b. Spot rate is
If 6 month forward rate is
i.

€ 0.8075 per £
€ 0.8134 per £

Premium or discount on £ 𝐹
; 𝑆 𝑆

6

x 12

0.8134 ;0.8075
0.8075

x 100 x 2 𝑃𝑟𝑒𝑚𝑖𝑢𝑚

𝑜𝑛 £ is 1.4613% p.a
ii.

Premium or discount on € 𝑆
; 𝐹 𝐹

x 12

6
0.8075 ; 0.8134
0.8134

x 100 x 2

Discount on € 1.451% p.a

Q8

Given

A

Spot
1 Month Forward
2 month forward
3 Month Forward
6 Month Forward

Rs 47.00 / 47.30 per $
Rs 47.20 / 47.50 per $
Rs 47.40 / 47.75 per $
Rs 47.60 / 47.90 per $
Rs 47.90 / 48.40 per $

if $ is bought ie relevant rate is Ask rate
a

Premium or discount on $

i.

1 month forward 𝐹

; 𝑆 𝑆

47.50 ;47.30
47.30

x 100

x 100

1 month forward premium on $ 0.423 % per month or 5.074% p.a
ii.

2 month forward

47.75 ;47.30
47.30

x 100

2 month forward premium on $ 0.9514% for 2 month or 5.708% p.a
iii.

3 month forward

47.90 ;47.30
47.30

x 100

3 month forward premium on $1.268 % for 3 month or 5.074% p.a
iv.

6 month forward

48.40 ;47.30
47.30

x 100

6 month forward premium on $ 2.236 % for 6 month or 4.651% p.a
b.

Premium or discount on Re

i.

1 month forward 𝑆

; 𝐹 𝐹

x 100

47.30 ;47.50
47.50

x 100

1 month forward discount on Re 0.4210 % per month or 5.053% p.a
Contd.

ii.

2 month forward

47.30 ;47.750
47.75

x 100

2 month forward discount on Re 0.942 % for 2 month or 5.654% p.a
iii.

3 month forward

47.30 ;47.90
47.90

x 100

3 month forward discount on Re 1.253 % for 3 month or 5.01% p.a

iv.

6 month forward

47.30 ;48.40
48.40

x 100

6 month forward discount on Re 2.2727 % for 6 month or 4.545% p.a
B

if $ is sold ie relevant rate is Bid rate
a
i.

Premium or discount on $

1 month forward 𝐹

; 𝑆 𝑆

x 100

47.20 ;47
47

1
ii.

iii.

47.40 ;47
47

x 100

month forward premium on $ 0.851% for 2 month or 5.106% p.a
3 month forward

3
iv.

month forward premium on $ 0.4255 % per month or 5.106% p.a
2 month forward

2

x 100

47.60 ;47
47

x 100

month forward premium on $1.277 % for 3 month or 5.106% p.a
6 month forward

47.90 ;47
47

x 100

6 month forward premium on $ 1.915 % for 6 month or 3.830% p.a

Contd.

.

b.
i.

Premium or discount on Re 𝑆
; 𝐹 𝐹

1 month forward

x 100

47 ;47.20
47.20

x 100

1 month forward discount on Re 0.4237 % per month or 5.085% p.a
ii.

2 month forward
47 ;47.40
47.40

x 100

2 month forward discount on Re 0.844 % for 2 month or 5.063% p.a
iii.

3 month forward
47 ;47.60
47.60

x 100

3 month forward discount on Re 1.2605 % for 3 month or 5.042% p.a
iv.

6 month forward
47 ;47.90
47.90

x 100

6 month forward discount on Re 1.879 % for 6 month or 3.758% p.a

Q9

Spot Rate

Rs 46.30 / 46.64 per $

One month forward rate if swap points are .15 / .20
46.30 /
46.64
+
. 15
.20
46.45
46.84
One month forward rate is Rs 46.45 / 46.84 per $

Two month forward rate if swap points are .25 / .30
46.30 /
46.64
+
. 25
.30
46.55
46.94
Two month forward rate is Rs 46.55 / 46.94 per $

Q10

Q11

Three month forward rate if swap points are .32 / .38
46.30 /
46.64
+
. 32
.38
46.62
47.02
Three month forward rate is Rs 46.62 / 47.02 per $

Spot Rate
Rs 46.30 / 46.55 per $
 One month forward rate if swap points are .15 / .11
46.30 /
46.55
. 15
.11
46.15
46.44
One month forward rate is Rs 46.15 / 46.44 per $

Two month forward rate if swap points are .20 / .14
46.30 /
46.55
+
. 20
.14
46.10
46.41
Two month forward rate is Rs 46.10 / 46.41 per $

Three month forward rate if swap points are .27 / .22
46.30 /
46.55
+
. 27
.22
46.03
46.33
Two month forward rate is Rs 46.03 / 46.33 per $

Spot Rate
DEM 1.5880 / 1.5890 per $
 One month forward rate if swap points are .10 / .05c
1.5880 /
1.5890
.0010
.0005
1.5870
1.5885
One month forward rate is DEM 1.5870 / 1.5885 per $
 Two month forward rate if swap points are .20 / .10c
1.5880 /
1.5890
.0020
.0010
1.5860
1.5880
Two month forward rate is DEM 1.5860 / 1.5880 per $
 Three month forward rate if swap points are .30 / .15c
1.5880 /
1.5890
.0030
.0015
1.5860
1.5880
Three month forward rate is DEM 1.5850 / 1.5875 per $

Q12

Spot Rate
$ 0.5875 / 0.5885 per DG
 One month forward rate if swap points are .12 / .18c
0.5875 /
0.5885
+
.0012
.0018
0.5887
0.5903
One month forward rate is $ 0.5887 / 0.5903 per DG
 Two month forward rate if swap points are .15 / .25c
0.5875 /
0.5885
+
.0015
.0025
0.5890
0.5910
Two month forward rate is $ 0.5890 / 0.5910 per DG
 Three month forward rate if swap points are .20 / .30c
0.5875 /
0.5885
+
.0020
.0030
0.5895
0.5915
Three month forward rate is DEM 0.5895 / 0.5915 per DG

Q13

Given Spot rates

$ 1.1575 / 1.1595 per £
Can $ 1.8500 / 1.8700 per £
¥ 190 / 200 per £

a. £ to be paid for purchasing 1,00,000 $ on spot
Since $ is to be purchased so relevant rate is Bid rate. Thus customer will buy
$ @ $ 1.1575 per £
Customer will purchase 1,00,000 $ for

1,00,000
1.1575

, i.e 86,393 £ spot

b. £ to be paid for purchasing 1,00,000 can $ on 3 months forward rates
Since Can $ is to be purchased, relevant rate is Bid rate.
Thus customer will buy can $ at 3 month forward rate of
can $ (1.8500 +0.0030) per £
Customer will purchase 1,00,000 can $ for

1,00,000
1.8530

, i.e 53,967 £

c. £ to be paid for purchasing 1,00,000 ¥ on 4 months forward rates
Since ¥ is to be purchased, relevant rate is Bid rate.
Thus customer will buy ¥ at 4 month forward rate of
¥ (190 - 5) per £
Customer will purchase 1,00,000 ¥ for

1,00,000
185

, i.e 540.541 £

Q14

Given

Spot

Dem 1.5975 / 1.5980 $

Spot

2 m forward

Dem 1.5955 / 1.5970 $

Riyal 3.7570 / 3.7600 $

3 m forward

DEM 1.5950 / 1.5965 $

Riyal 3.7580 / 3.7610 $

Cross rate DEM / Riyal = 𝐷𝐸𝑀

$

2 month forward

=

1.5955

=

DEM 0.424335 / 0.425073 Riyal

=

1.5950 x 3.7610 / 1.5965 x 3.7580

=

DEM 0.424089 / 0.424827 Riyal

3 month forward

x

$ 𝑅𝑖𝑦𝑎𝑙

1
x 3.7600

Riyal 3.7550 / 3.7560 $

1

/ 1.5970 x 3.7570

1

1

A firm wishes to buy Riyals against DEM 3 months forward
-

Applicable rate is Ask rate ie Firm will buy riyals @ DEM 0.424827 per Riyal

-

For 10,000 DEM , ( 0.424827 ) 23,539 riyals can be bought

-

If the firm wishes to buy Riyals with option over the third month, quote provided
by Bank will be DEM 0.424335 / 0.424827 per Riyal

10,000

Q15

Indian Rayon is importing machinery from the US . Thus Indian rayon has to pay $ to US
firm . Since exact date of delivery and payment is not known and payment is to be
made between second and third month, so Indian Rayon will take an option of over a
third month contract
Spot rate

Rs 45.4500 / 45.8525 USD

1 month forward

Rs 44.70 / 45.5025 USD

( 45.45 – 0.75)

2 month forward

Rs 44.30 / 45.1025

(45.45 – 1.15)

3 Month Forward

(45.8525 – 0.35)

(45.8525 – 0.75)

Rs 44.05 / 44.9025 USD

(45.45 – 1.40)

(45.8525 – 0.95)

If firm wants to hedge in the Forward market by over a third month contract, bank will
give following quote
Rs 44.30 / 44.9025 USD
i.e Indian Rayon will book a forward contract to purchase $ at Rs 44.9025 per USD

Q16

An exporter in London expects to receive $ 2,50,000 between 3rd and 4th month. To
protect its proceeds exporter should Hedge by over a fourth month contract.
Bank will provide following over a 4th month quote
$ 1.8066 / 1.8105 per £
Exporter will sell $ to bank @ $ 1.8066 per £

Q17

An importer requested Bank to remit SGD$ 25,00,000 on 28 Jan 2005, However due to
bank strike Bank was able to remit payment on 4th Feb. 𝑅𝑠

Since Importer has to buy SGD $, thus from cross rate 𝑆𝐺𝐷 relevant rate is Ask rate

Amount to be paid for purchasing 25,00,000 SGD $ if bank had remitted on 28th jan
2005.
On 28th jan 2005 importer could purchase SGD $ at 𝑅𝑠 𝑆𝐺𝐷

=
=

+ Exchange margin 0.125 %

=
= 𝑅𝑠

$

x

$
£

x

£ 𝑆𝐺𝐷

45.90 x 1.7850 x

1
3.1575

25.948219
+ 0.032435
25.980654

Payment to be made for remitting 25,00,000 SGD on 28th Jan 2005
25,00,000 x 25.980654 = Rs 649,51,635

Amount actually paid for purchasing 25,00,000 SGD $ on 4th jan 2005.
On 4th 2005 importer could purchase SGD $ at 𝑅𝑠 𝑆𝐺𝐷

=
=

+ Exchange margin 0.125 %

=
= 𝑅𝑠

$

x

$
£

x

£ 𝑆𝐺𝐷

1

45.97 x 1.7775 x 3.1380
26.039412
+ 0.032549
26.071961

Payment made for remitting 25,00,000 SGD on 4th Feb 2005
25,00,000 x 26.071961 = Rs 651,79,903
Thus net loss to importer due to delay in payment = 651,79,903 - 649,51,635
= Rs 2,28,268

Q18

M/s JVG of London made arrangements with Bank to make payment of ¥ 4,00,00,000
on 1st july 2008, However Bank made payment on 24th July 2008
£

Since M/s JVG has to buy yen, so from Cross rate ¥ , relevant rate is ASK rate

£ to be paid for purchasing 4,00,00,000 ¥ on 15th July 2008
£
¥

=

£

x


$

x

$ 𝐷𝑀

x 𝐷𝑀

¥

= 1.4705 x 0.4840 x 0.7580 x

JVG will purchase ¥ 4,00,00,000 @ £ 0.002251 per ¥ for ( 4,00,00,000 x 0.002251) =
£ 90,040
th
£ to be paid for purchasing 4,00,00,000 ¥ on 24 July 2008
£
¥

=

£

x


$

x

$ 𝐷𝑀

x 𝐷𝑀

¥

= 1.4740 x 0.4780 x 0.7620 x
+ 0.15% exch. Margin


Q19

240

= 0.002248
= 0.000003
0.002251

+ 0.15% exch. Margin

1

1
265

= 0.002026
= 0.000003
0.002029

JVG will purchase ¥ 4,00,00,000 @ £ 0.002029 per ¥ for ( 4,00,00,000 x 0.002029) =
£ 81,160
Gain to JVG due to delay
=
90,040 – 81,160 = £ 8,880
Same as Q17

Q20

Customer has entered into 3 Month forward contract for selling 10,000 Swiss Francs
@ Rs 27.25 / SF
However after 2 Months customer approached bank for cancellation of Forward
Selling contract. For cancellation customer will enter into forward purchase contract
of 10,000 Swiss francs with Bank @ 1 month forward rate applicable on date of
cancellation i.e customer will purchase Swiss francs @ Rs 27.52 / SF (ask rate)
On due date
Customer will sell SF at
Buy SF at
Loss to customer per SF

Rs 27.25
Rs 27.52
0.27

Total loss to customer 10,000 x 0.27 = Rs 2700

Q21

Bank has entered into forward contract for Purchasing 50,000 £ @ Rs 82.75 / £
However on maturity customer approached bank for cancellation of Forward contract.
For cancellation Bank will enter into Sale contract of 50,000 £ with customer @ rate
applicable on date of maturity i.e Bank will sell 50,000 £ @ 83.15 / £
On maturity
Bank will buy £ at
Rs 82.75
Bank will sell £ at
Rs 83.15
Gain to bank per £
0.40
On Maturity bank will recover from customer 50,000 x 0.40 = Rs 20,000

Q22

Bank has entered into forward contract for Selling $ 1,45,000 @ Rs 46.90 / $
After Maturity customer approached bank for cancellation of Forward contract. For
cancellation, Bank will enter into Purchase contract of 1,45,000 $ with customer @
rate applicable on 21st March i.e Bank will purchase $ 1,45,000 @ 47.05 / $.
Since customer approached bank after Maturity, so any gain to customer due to
cancellation shall NOT be paid to customer. However any loss to customer due to
such cancellation shall be recovered from customer
On 21st March
Bank will Sell $ at
Rs 46.90
Bank will Buy $ at
Rs 47.05
Loss to bank (or gain to customer )per $
0.15
Total gain to customer which shall not be paid by bank to customer is 1,45,000 x 0.15
= Rs 21,750
th

Q23

Bank has entered into forward contract for Selling $90,000 @ Rs 46.34/ $ due on 15 March 08
th

customer did not approached the bank on/before/after date of Maturity ie 15 March 08.
th
Bank will itself, after 14 days from date of maturity i.e on 15 day from date of maturity cancel
the forward contract. For cancellation, Bank will enter into Purchase contract of 90,000 $ with
th
customer @ rate applicable on 30 March i.e Bank will purchase $ 90,000 @ 46.50 / $.
Since customer did not approached the bank on / before /after Maturity, so any gain to
customer due to cancellation shall NOT be paid to customer. However any loss to customer
due to such cancellation shall be recovered from customer
th

On 30 March
Bank will Sell $ at
Bank will Buy $ at

Rs 46.34

Rs 46.50
Loss to bank (or gain to customer )per $
0.16
Total gain to customer which shall not be paid by bank to customer is 90,000 x 0.16
= Rs 14,400

Q24

AR constructions Ltd.
Bank has entered into 3 month forward contract for Selling £ 4,00,000 @ Rs 78.65 / £
th

customer did not approached the bank on/before/after date of Maturity ie 15 March 08.
th
Bank will itself, after 14 days from date of maturity i.e on 15 day from date of maturity cancel
the forward contract. For cancellation, Bank will enter into Purchase contract of 90,000 $ with
th
customer @ rate applicable on 30 March i.e Bank will purchase $ 90,000 @ 46.50 / $.
Since customer did not approached the bank on / before /after Maturity, so any gain to
customer due to cancellation shall NOT be paid to customer. However any loss to customer
due to such cancellation shall be recovered from customer
th

On 30 March
Bank will Sell $ at
Bank will Buy $ at

Rs 46.34

Rs 46.50
Loss to bank (or gain to customer )per $
0.16
Total gain to customer which shall not be paid by bank to customer is 90,000 x 0.16
= Rs 14,400

Q25

th

Customer booked a forward contract to buy 2,00,000 $ due on 5 March. Customer did not
th
approach the bank PQR ltd.for cancellation of forward contract. The bank will on 15 day after
th
maturity i.e on 20 March, suo-moto cancel the contract.
th

In effect on 20 march a reverse contract is made on behalf of customer by PQR bank i.e
th
th
customer will sell 2,00,000 $ on 20 march. Since customer will Sell $ on 20 march, relevant
rate is BID rate. Customer will sell $ @ Rs 46.18 / $
Statement of Net gain or loss on cancellation of forward contract
Rs
th
Amount payable by customer on purchase of 2,00,000 $ on 5 march
2,00,000 x 46.10
92,20,000
Amount to be recieved on selling 2,00,000 $ @ 46.18 / $
2,00,000 x 46.18
92,36,000
Net Profit to customer on cancellation
16,000
Since customer did not approached the bank for cancellation, so any profit on cancellation to
PQR will not be paid by bank. But any loss on cancellation to PQR Ltd. will be recovered by
Bank. So Rs gain of Rs 16,000 to customer will not be paid by bank
OR gain to customer is 2,00,000 (46.18 – 46.10)
2,00,000 x 0.08 = Rs 16,000
Q26

customer has entered into forward contract to sell Swiss frank to bank @ Rs 36.25 after 3
months. Customer approached bank after 2 months for cancellation on forward contract.
For cancellation customer will make reverse contract to buy swiss frank from bank on due date.
Since customer has to buy CHF, so relevant rate is ASK rate. Thus customer will book a 1 month
forward contract to buy Swiss frank from bank @ Rs 36.52 per swiss frank
Statement of net profit or loss to customer on cancellation of forward contract
Amount receivable by customer on original contract to sell CHF
1,00,000 x 36.25
Amount payable by customer on reverse contract to buy CHF
1,00,000 x 36.52
Net loss to customer

36,25,000
36,52,000
27,000

OR loss to customer 1,00,000 ( 36.52 – 36.25)
1,00,000 x 0.27 = 27,000
Q27

Customer has made a contract with bank to purchase £ 3,00,000 @ Rs 75.45 per £ due
th
on 15 dec
On due date customer approached bank for cancellation of forward contract. For cancellation
customer will make a reverse contract with bank to sell £ to bank at the rates applicable on due
date
Since for cancellation customer has to sell £ so relevant rate is BID rate
Inter bank bid rate on due date is Rs 75.35 per £. Banks margin is 0.090%
So customer will sell £ to bank at 75.35 –

0.090
100

x 75.35 = Rs 75.282185 per £

Statement of profit or loss to customer on cancellation of forward contract
Amount payable as per original contract to buy £
3,00,000 x 75.45
Amount receivable on reverse contract to sell £
3,00,000 x 75.282185
Net loss to customer
Q28

226,35,000
225,84,655.50
50,344.50
th

Customer made a forward contract to sell € 2,50,000 to bank @ Rs 102.30 / € due on 15 oct. On
due date customer approached Bank for cancellation of forward contract.
For cancellation customer will make a reverse contract to buy € from bank at the spot rates
applicable on due date. Since customer has to buy €, so relevant rate is ASK rate
Inter bank ASK rate on due date is Rs 103.20 and inter bank margin is 0.150%
So customer will buy € from bank @ Rs 103.20 + 0.0015 x 103.20 = Rs 103.3548 /€
Statement of Profit or loss on cancellation of forward contract

Q29

Amount receivable as per original contract to Sell €
2,50,000 x 102.30

255,75,000

Amount payable as per reverse contract to buy €
2,50,000 x 103.3548
Net loss to customer

258,38,700
2,63,700
st

customer made a forward contract to sell $ 5,00,000 to bank @ Rs 35.30 per $ due on 31 oct.
th
On 30 sept (before due date) customer approached bank for cancellation of forward contract
For cancellation customer will make a reverse contract to buy $ from bank at 1 Month Forward
th
rate applicable on 30 sept. Since customer had to buy $ in reverse contract , so relevant rate is
ASK rate.
th

1 month forward ask rate on 30 sept is
Spot ask rate (inter bank)
+ swap points
+ margin .0020 x 37.58

37.40
0.18
37.58
0.07516
37.65516

Statement of Profit or loss on cancellation of forward contract
Amount receivable as per original contract to Sell $
5,00,000 x 35.30

176,50,000

Amount payable as per reverse contract to buy $
5,00,000 x 37.65516
Net loss to customer

188,27,580
11,77,580

Q30

Customer made a forward contract to sell 2,00,000 £ to retail bank (which in turn will sell these
th
£’s to wholesale bank) @ Rs 85.7475 / £ due on 15 October 2007.
th

On 15 june customer approached bank to cancel forward contract. For cancellation customer
will make a reverse forward contract to buy £ at forward rate applicable for October in june
Since customer has to buy £ for cancellation, so relevant rate is Ask rate. Customer will book a
th
th
forward contract on 15 june to buy £ on 15 October at following rate
Inter bank October Ask rate
+ margin of retain banker
October forward rate

85.7350
0. 0650
85.8000

Statement of profit or loss to customer on cancellation of forward contract

Q31

Amount to be received on selling of £ as per original contract
2,00,000 ( 85.7475 – 0.0475)
=

171,40,000

Amount payable on purchase of £ as per reverse contract
2,00,000 ( 85.8)
Net loss to customer

171,60,000
20,000

th

customer made a forward contract to sell $ 7,50,000 at Rs 46.70 / $ to bank due on 15 feb. On
th
15 Jan customer approached bank for extension of forward contract by one month.
th
On 15 jan following contracts will be made by customer with bank
th

1. A reverse contract to cancel original contract of selling $ on 15 feb. i.e customer will make
th
th
one month forward contract on 15 jan to purchase $ 7,50,000 on due date 15 feb. since
th
customer had to buy $ so relevant rate is ASK rate. Thus customer will buy $ on 15 feb @
Rs 46.71 / $
th

2. New two month forward contract to sell $ 7,50,000 due on 15 march. Since customer has to
th
sell $ , so relevant rate is BID rate. Customer will on 15 Jan book a 2 month forward contract
to sell $ at Rs 46.73 / $
Statement of profit or loss of customer on extension
Amount receivable from sale of 7,50,000 $ as per original contract
7,50,000 x 46.70
Amount payable for purchase of 7,50,000 $ as per reverse contract
to cancel original contract 7,50,000 x 46.71
loss to customer

350,25,000
350,32,500
7,500

Q41

Robinson shillings Pvt. Ltd. an Indian company purchased goods from US company for
$ 2,50,000, payable in 4 months. RS Ltd has to buy $,Quotes are

$

, so relevant rate is ASK rate

RS Ltd has 2 options
1. Book a forward contract today, to purchase 2,50,000 $ after 4 months
RS pvt Ltd will book a forward contract today to purchase 2,50,000 $ after 4 months
@ Rs 44.85 per $
Rs Ltd will pay 2,50,000 x Rs 44.85
=
Rs 112,12,500
2. Rs Ltd will purchase 2,50,000 after 4 months at Rs 45 per $
Rs Ltd will pay 2,50,000 x Rs 45

=

Rs 112,50,000

Since Rupee payment (outflow) is lower in Forward contract, son RS ltd will book a forward
contract today to purchase $ after 4 months.
Q42

Uk customer purchased machine from Japan for ¥ 20,00,000, payment to be made in 3 months. If
quotes are

¥
£

and customer has to buy ¥ (and sell £), so relevant rate is BID rate.

UK customer has 2 options.
1. Book a forward contract today to buy ¥ after 3 months
¥
£

=

¥

x

$

$
£
= 105 x 1.6320
= ¥ 171.36

Customer will book a forward today to buy 20,00,000 ¥ after 3 months @ ¥ 171.36 per £
Customer will pay

20,00,000
117.36

= £ 11,671.3352

2. To purchase ¥ after 3 months at spot rate after 3 months.
¥
£

=

¥

x

$

$
£
= 115 x 1.6330
= ¥ 187.795

Customer will purchase ¥ after 3 months at ¥ 187.795 per £
Customer will pay

20,00,000
187.795

= £ 10,649.9108

Option to purchase ¥ at spot rate after 3 months is better option. Customer will save
(11,671.3352 – 10,649.9108) = 1,021.4244 £

Q43

An Indian company purchased goods having Invoice value of $ 13,750 to be paid in 3 months.
At today’s spot rate of $ 0.0275 per Re, for $ 13,750 company has to pay Rs 5,00,000
Exchange rate is expected to decline in 3 months
Spot rate after 3 months is $ 0.0275 x 0.95 =
$ 0.026125 per Re
If company purchase $ 13,750 after 3 months at spot rate after 3 months of $ 0.026125 per Re.
company will pay
13,750
0.026125

= Rs 5,26,315.789

Thus loss to Indian company is (Rs 5,26,315.789 – Rs 5,00,000) = Rs 26,315.789
This loss can be hedged, if company book a forward contract today to purchase
$ 13,750 @ $ 0.0273 per Re
Company will pay
13,750
0.0273

= Rs 5,03,663.004

Thus loss to company (5,05,663 – 5,00,000)
If forward hedge is taken, loss to company can be hedged to the extent of
Rs (5,26,315.789 – 5,03,663.004)
= Rs 22,652.785
Q44

An Indian company sold goods to US company for $ 2,50,000, expected to be received in 6
months.
Spot rate today is $ 0.0222 per Re
At today’s spot rate company is expected to receive

2,50,000
0.0222

, Rs 112,61,261

$ will depreciate in 6 months by 20 % p.a
Spot rate after 6 months

0.0222
0.90

=

= $ 0.024667 per Re
If Indian company sells $ 2,50,000 at spot rate after 6 months, it will receive
2,50,000
Rs 101,34,998.175
0.024667
Thus loss to Indian company = 112,61,261 - 10134998 = Rs 11,26,263
This loss can be hedged if company book a forward contract today to sell 2,50,000 $ at
$ 0.0241 per Re
If forward contract is taken, company will receive

2,50,000
0.0241

Rs 103,73,444

Thus loss to company ( 112,61,261 – 103,73,444) = Rs 8,87,817
If forward contract is taken loss can be hedged (reduced) by 11,26,263 – 8,87,817 = Rs 2,38,446

Q45

An Indian company Exported goods for 100 lac ¥. ¥ is not quoted against Re. If Quote is

¥

, then

relevant rate is ASK rate, as Indian company had to buy ¥.
Spot rate today is

¥
$

129.75 and

So,

¥

=

$

$

x

41.79
$
¥

1

= 41.79 x 129.75
= Re 0.32208 per ¥
So according to today’s spot rate company will receive 100 lac x 0.32208 = Rs 32,20,800
¥

Spot rate after 6 months are
So,

144 and

$

¥

=

$

x

$

43

$
¥
1

= 43 x 144
= Re 0.298611 per ¥
If 100 lac ¥ are sold at spot rate after 6 months, company will receive 100 lac x 0.298611 =
Rs 29,86,110
So, loss to company if ¥ is sold at spot rate after 6 months (29,86,110 – 31,22,680) = Rs 1,36,570
This loss can be hedged if company book a forward contract today to sell ¥ in September
6 month forward contract is available at
So,

¥

¥
$

=

137.35 and
$

x
1

$

42.89

$
¥

= 42.89 x 137.35
= Re 0.312268 per ¥
If 100 lac ¥ are sold at forward rate after 6 months, company will receive 100 lac x 0.312268 =
Rs 31,22,680
So, loss to company if ¥ is sold at spot rate after 6 months (31,20,800 – 31,22,680) = Rs 98,120
If forward hedge is take , loss to company is reduced by (1,36,570 – 98,120) = Rs 38,450
b.

If Spot rate after 6 months are
So,

¥

¥
$

=

137.85 and
$

x

$

42.78

$
¥
1

= 42.78 x 137.85
= Re 0.310337 per ¥
If 100 lac ¥ are sold at spot rate after 6 months, company will receive 100 lac x 0.310337 =
Rs 31,03,370
If 100 lac ¥ are sold at forward rate after 6 months, company will receive 100 lac x 0.312268 =
Rs 31,22,680
Since Re amount received in forward contract is more than amount received on basis of spot rate
after 6 months, so it is justified to take forward cover .

Q46

A US company sold machine to Switzerland government @ CHF 1,00,000 to be received in 30
days
Today’s spot rate is CHF 1.72 per $
1,00,000
At today’s spot rate company is expected to receive
, $ 58,140
1.72
If company takes forward cover, it can sell CHF 1,00,000 @ CHF 1.71 per $
1,00,000
Company will receive
= $ 58480
1.71
b.

Spot rate is CHF 1.72 per $
Forward rate is CHF 1.71 per $
CHF is at premium
;
Premium on CHF is
x 100
=

Q47

1.72;1.71
1.71

x 100 = 0.585%

A French company sold goods to American importer for $ 24,000.
Spot rate today is FF 5.70 per $
At today’s spot rate company is expected to receive 24,000 x 5.70 = FF 1,36,800
FF to strengthen by 5% in 90 days i.e rate after 90 days is

5.70
1.05

= FF 5.428571 per $

If FF strengthen by 5% then company is expected to receive 24,000 x 5.428571 = FF 1,30,285
Loss to company 1,36,800 – 1,30,285 = FF6,515
If FF weaken by 5% in 90 days, then rate after 90 days is

5.70
.95

= FF 6 per $

If FF weaken by 5%, company is expected to receive 24,000 x 6 = FF 1,44,000
Profit to company = 1,44,000 – 1,36,800 = FF 7,200
Q48

Excel exporters an Indian company has to receive $ 1,00,000 in 60 days. When consignment was
priced exchange rate was Rs 45.50 per $
1. Current spot rate Rs 45.60 per $
60 days forward rate quoted by bank Rs 45.20 per $
;

Forward Discount on $ =
=

60

x 365

45.20 ; 45.60
45.60

60

x 365 = - 0.0534

Discount on $ is 5.34%
2. Consignment is priced when rate was Rs 45.50 per $. Thus when consignment was priced
company expected to receive Rs 45,50,000
At forward rate of rs 45.20 per $,, company is expected to receive Rs 45,20,000
Thus operating loss to company (45,50,000 – 45,20,000) Rs 30,000

Q49

Indian company purchased goods from Japanese company for ¥ 108 lac
At current spot rate it is equal to Rs 30 lacs
Thus current spot rate is

108
30

= ¥ 3.6 per Re

Exchange rate is expected to decline by 10% in 3 months
Spot rate after 3 months is 3.6 x 0.9
= ¥ 3.24 per Re
Thus if ¥ is purchased at spot rate after 3 months, Indian company will pay

108
3.24

= Rs 33.333 lac

Loss to Indian company if payment is made at spot rate after 6 months (33.33 – 30) = 3.333 lacs
This loss can be hedged by booking a forward contract today to buy ¥ @ ¥ 3.3 per Re
108
3.3

= Rs 32.727 lac

Loss to Indian company if forward cover is taken (32.727 – 30) = Rs 2.727 lac
Thus if forward cover is taken loss of company is reduced by 3.333 – 2.727 = 0.606 lac
Q50

A US company is to receive DM 3,50,000 from a german co. in 6 months
If US company take a forward hedge, it will book a forward contract to sell DM @ 7.834 DM per $.
US company will receive

3,50,000
7.834

= $ 44,677

If Forward hedge is not taken, US company can sell DM after 6 months at spot rate after 6
months
i.
If after 6 months $ gained 5%, spot rate after 6 months will be 7.5 x 1.05
= DM 7.875 per $
Company will receive

3,50,000
7.875

= $ 44,444

In this case profit to US company due to forward hedge is ( 44,677 – 44,444) = $ 233
ii.

If after 6 months $ lost 2%, spot rate after 6 months will be 7.5 x 0.98 =
= DM 7.35 per $
Company will receive

3,50,000
7.35

= $ 47,619

In this case loss to company due to forward hedge is (47,619 – 44,677) = $ 2942
iii.

If after 6 months $ remained stable, spot rate after 6 months is DM 7.5 per $
Company will receive

3,50,000
7.5

= Rs 46,667

In this case if forward hedge is taken, company will incur a loss of (46,667 – 44,677)
= $ 1990

Q51

PQR Ltd an Indian company purchased goods for £ 2,00,000 from UK firm, payable after 4
months. Since PQR Ltd has to purchase 2,50,000 £, so relevant rate ASK rate
PQR has 2 options
1. Pay immediately without any interest charge
In this case company will borrow from bank @ 15% p.a and purchase £ for payment to UK
firm
Amount borrowed from Indian bank to purchase £ at
Spot rate of 78.60 per £ 2,00,000 x 78.60
Interest on amount borrowed @ 15% p.a for 4 months
157,20,000 x 0.15 x

4
12

=

Rs 157,20,000

=

Rs 7,86,000

Total cost of 2,50,000 £

Rs 165,06,000

2. Pay to UK firm 2,50,000 £ along with interest @ 5% p.a
In this case firm will book a forward contract today to buy £ payable along with interest after 4
months @ Rs 79.04 per £
Amount of consignment
Interest on consignment amount 2,00,000 x 0.05 x
£ payable to UK firm
Amount payable to purchase £ 2,03,333 x 79.04
Re payment is lower in 2
interest of 5 % p.a
Q52

nd

£ 2,00,000
4
12

£ 3,333
2,03,333
Rs 160,71,440

option, so PQR Ltd should make payment to UK firm after 4 months at

CC Ltd is considering to purchase 20,000 bales of cotton @ 12 € each . Cost of total
consignment is 2,40,000 €, payable in 3 months. Since Cc ltd has to purchase €, so relevant rate
is ASK rate
CC ltd. has 2 options
a. To pay in 3 months @ 15% p.a and cover the exchange risk forward for 3 months
In this case. CC ltd will pay to vendor after 3 months along with interest of 15% p.a and will
book a forward contract today to purchase € after 3 months

Amount of consignment

€ 2,40,000

Interest on consignment 2,40,000 x 0.15 x 0.25

€ 9,000

€ payable to vendor
Amount payable to purchase € = 2,49,000 x ( 108.50 + 0.40)

2,49,000
Rs 271,16,100

b. Settle now at current spot rate and pay interest on overdraft for 3 months
In this case, CC Ltd will pay € 2,40,000 to vendor immediately by borrowing from bank @
18% p.a
Amount borrowed from bank to purchase € 2,40,000
2,40,000 x 108.50
Interest on amount borrowed
260,40,000 x 0.18 x 0.25
Amount payable to bank

2,60,40,000
11,71,800
272,11,800

st

Since re outflow is lower in 1 option, So company should pay to vendor after 3 months along
with interest of 15% p.a
Q53

A firm is contemplating to purchase goods from US for 50,000$, to be paid in 90 days. US
supplier offered interest free credit of 60 days
Firm has two options
1. To avail additional 30 days credit from supplier
In this case firm will pay to US vendor after 90 days, along with interest @ 6% p.a, for 30
days. Firm will take a 90 days forward contract to buy $ at Rs 45.55 per $
Amount of consignment
Interest payable to vendor @ 6% p.a for 30 days
50,000 x 0.06 x

30

$ 50,000
$

365

Total $ payable to vendor

246.57

50,246.57

Firm will purchase $ amount payable to vendor at 50,246.57 x 45.55 = Rs 22,88,731.26
2. To pay to supplier after 60 days.
In this case, firm will pay to US vendor after 60 days by borrowing from bank @ 9% p.a for 30
days. Firm will book a 60 days forward contract today, to purchase dollars after 60 days
Amount borrowed from bank for purchasing $ after 60 days
50,000 x 45.30
Interest payable to bank for 30 days
22,65,000 x 0.09 x

30
365

Total amount payable to bank
Since Re outflow is lower in 2
days credit from Bank

nd

22,65,000
16,754.79
22,81,754.79

option so, firm should pay to vendor in 60 days, by taking 30

Q54

US co. purchased goods worth 1,00,000 DM from a firm in Germany. German firm offered a
discount of 2%, if payment is to be made in 10 days
a. If payment is made in 10 days
US company will avail discount of 2% and amount payable to German firm is 1,00,000 x 0.98
= DM 98,000
US company will purchase 98,000 DM at spot rate of $ 0.55 / DM
US company will pay 98,000 x 0.55 = $ 53,900
b. If payment is made in 90 days
US company will book a forward contract today to purchase 1,00,000 DM @ $ 0.56 per DM
US co. will pay 1,00,000 x 0.56 = $ 56,000
c.

Difference between a and b is 56,000 – 53,900 = $ 2,100
If payment is made after 90 days, 2,000 additional DM had to be paid. Which are avoidable if
payment is made in 10 days. Thus cost of 2,000 DM is due to currency fluctuation
Thus difference between a and b due to time value is 2,000 x 0.56 = $ 1120
If payment is made after 10 days, 98,000 DM is purchased at $ 0.55 per DM, whereas if
payment is made after 90 days, 98,000 DM are purchased at $ 0.56 per DM. Thus $ 0.01 per
DM is paid in excess due to currency fluctuation
Difference between a and b due to currency fluctuation is 98,000 x 0.01 = $ 980

Q55

Alert Ltd is planning to import a machine from japan costing ¥ 3400 lac to be paid in 180 days
Alert Ltd has 2 options
1. To pay Japanese firm immediately by purchasing ¥ at spot rate today by borrowing from bank
in India @ 18% p.a with quarterly rests
Amount borrowed from bank in India to purchase ¥ at spot rate today
3400
340

x 100

Interest on amount borrowed 1000 ( 1 +

Rs 1,000 lac
0.18 2
)
4

92.025

Total cost to Alert Ltd

Rs 1,092.025 lac

2. To pay Japanese firm immediately by borrowing ¥ from Tokyo bank. Bank in Tokyo will
extend a loan of ¥ 3400 lac @ 2% p.a, if Indian bank gives LC for which Indian Bank charges
Commission of 2% p.a
Commission will be 1000 lacs x 0.02 x 0.5

=

10 lac

For paying commission Alert Ltd will take a loan of Rs 10 lac from Indian bank @ 18% p.a
with quarterly rests
2
Amount payable after 6 months to Indian Bank 10 lac (1 + 0.045) = Rs 10.92025

Amount payable to Tokyo Bank after 180 days
3400 x ( 1 + 0.02x

6
12

)

=

¥ 3434 lacs

Amount payable to Tokyo bank can be purchased at 180 days forward rate of ¥ 345 per Rs
100
Alert Ltd will pay
Total re outflow in 2

3434

nd

345

x 100

=

Rs 995.3623 lacs

option 10.92 lac + 995.3623 lac = Rs 1006.2823 lac
nd

Total cash outflow in 2 option is lower than cash outflow in option 1. Therefore, offer from
foreign branch should be accepted.

Q56

a.

US
¥ 240.85 / 242.46 per $
Japan ¥ 244 / 246 per $
Since 2 quotes are not overlapping each other, so arbitrage opportunity exist
If trader has 10,000 $
He will sell $ in Japan @ ¥ 244 / $, and receive
10,000 x 244
He will buy $ from US @ ¥ 242.46 per $
And will receive

France
India

24,40,000 ¥

=

242.46

(10,063.5156 – 10,000)

Arbitrage profit
b.

24,40,000

=

=

10,063.5156 $
63.5156 $

Rs 140/ 145 per €
Rs 133 / 138 per €

Since 2 quotes are not overlapping each other, so arbitrage opportunity exists
If trader has 10,000 €
He will sell € in france @ Rs 140 per € and receive
10,000 x 140
He will buy € from Indian bank @ Rs 138 per € and receive
14,00,000

€ 10,144.93

138

€ 144.93

Net profit
c.

UK
US

Rs 14,00,000

£ 0.6322 / 0.6352 per $
$ 1.5960 / 1.5944 per £

( calculate inverse of Us quote to check overlapping)

Since 2 quotes are not overlapping each other, so arbitrage exists
If Trader has 10,000 $
He will sell $ in UK @ £ 0.6322 per $ and receive
10,000 x 0.6322
He will sell £ in US @ $ 1.5960 per £ and receive
6322 x 1.5960
Arbitrage profit ( 10,089.912 – 10,000)

=

£ 6322

=
=

$ 10,089.912
$ 89.912

d. Switzerland CHF 1.3689 / 1.3695 per $
US
$ 0.7090 / 0.7236 per CHF
Since 2 quotes are not overlapping each other, so arbitrage opportunity exist
If trader has 10,000 CHF
He will buy $ from Switzerland and receive
10,000

=

1.3695

$ 7,301

He will buy CHF from US bank and receive
7301

=

0.7236

e.

Frankfurt
New York

CHF 10,091.12

DM 1.3579 / 1.3585 per $
$ 0.7149 / 0.7925 per DM

Since 2 quotes are not overlapping, so arbitrage exists
If trader has 10,000 DM
He will sell DM in Frankfurt and buy $
10,000

=

1.3585

= $ 7361.059

He will sell $ in Newyork and buy DM
7361.059
0.7295

Arbitrage profit
Q57

London

= 10,090.55
=

DM 90.55

DEM 3.5250 / 3.5255 per £
¥
180.80 / 181.30 per £
¥

a.

=

¥
£

x

£

180.80

/

181.30

per DM
3.5255 3.5250
= ¥ 51.283505 / 51.432624 per DM

b.

If Spot rate in Frankfurt is ¥ 51.1530 / 51.2550 per DM
Check overlapping between

Spot rate ¥ 51.1530 / 51.2550 per DM
Cross rate ¥ 51.283505 / 51.432624 per DM
Since two quotes are not overlapping each other so arbitrage exist
London
DEM 3.5250 / 3.5255 per £
¥
180.80 / 181.30 per £
Frankfurt

Spot rate ¥ 51.1530 / 51.2550 per DM

Arbitrage opportunity exist
If trader has 10,000 DM
-

He will sell DM in London @ DM 3.5255 per £ and receive

10,000
3.5255

= £ 2,836.4771

-

He will sell £ 2836.4771 in London @ ¥ 180.80 per £ and receive
2836.4771 x 180.80
=
¥ 5,12,835.06
He will sell ¥ 5,12,835.06 in Frankfurt @ ¥ 51.2550 per DM and receive

-

5,12,835.06

=

51.2550

Q58

Arbitrage profit

New York

a.

£

DM 10,005.56159

=

DM 5.5619

$ 1.5275 / 1.5285 per £
SFr 1.5330 / 1.5335 per $

$

=

$

= 1.5330 x 1.5275 / 1.5335 x 1.5285
=
b.

SFr 2.341657 / 2.34395 per £

If London Bank quotes SFr 2.3730 / 2.3740 £
Along with (cross rate) SFr 2.341657 / 2.34395 £
Quotes does not overlap each other, so arbitrage possibility exist
New York

$ 1.5275 / 1.5285 per £
SFr 1.5330 / 1.5335 per $

London

SFr 2.3730 / 2.3740 £

If trader has 10,000 £
-

He will sell £ to London @ SFr 2.3730 / £ and buy SFr
10,000 x 2.3730
SFr 23,730
He will sell SFr & buy $ from NewYork Bank @ $ 1.5335 / $
23,730 x

-

1

He shall buy £ from NewYork @ $ 1.5285 / £
15,474.404 x

c.

$ 15,474.404

1.5335
1
1.5285

£ 10,123.914

Arbitrage Profit

£ 123.914

If London Bank Quotes SFr 2.3750 / 2.3770 per £
Cross Rate
SFr 2.341657 / 2.34395 per £
Since quotes are not overlapping each other, so arbitrage opportunity exist
Newyork

London
-

$ 1.5275 / 1.5285 per £
SFr 1.5330 / 1.5335 per $
SFr 2.3750 / 2.3770 per £ If trader has 10,000 £

He will sell £ to London @ SFr 2.3750 / £ and buy SFr
10,000 x 2.3750

SFr 23,750

-

He will sell SFr & buy $ from NewYork Bank @ $ 1.5335 / $
23,750 x

-

1

He shall buy £ from NewYork @ $ 1.5285 / £
15,487.4470 x

Q59

a.

$ 15,487.4470

1.5335
1

£ 10,132.448

1.5285

Arbitrage Profit

New York
France
London

£ 132.448

$ 2.4110 / £
Ff 3.997 / $
£ 0.1088 / FF

If trader has £ 50,000, he will arbitrage profit as follows
-

He will buy $ from New York @ $ 2.4110/ £
50,000 x 2.4110
He will Buy FF from france @ FF 3.997/ $
1,20,550 x 3.997
He will buy £ in London @ £ 0.1088 / FF
0.1088 x 4,81,838.35
Profit ( 52,424.01248 – 50,000)

b.

London
India
New York

$ 1,20,550
FF 4,81,838.35
£ 52,424.01248
£ 2424.01248

Rs 77.52 / £
Rs 48.30 / $
$ 1.6231 / £

If trader has $ 1,00,000, he will make arbitrage profit as follows
-

He will sell $ 1,00,000 in India and buy Rs @ Rs 48.30 / $
1,00,000 x 48.30
He will Buy £ in London @ Rs 77.52 / £
48,30,000 x

Q60

Spot rate
ROI
¥
$

1

£ 62,306.5015

77.52

He will Buy $ in New York @ $ 1.6231 / £
62,306.5015 x 1.6231
Arbitrage profit
¥ 120 / $
8%
12%

a. Forward Rate (

(

) =

1:
1:

)

1 : 0.08

=

120 x

=

120 x

=

¥

1 : 0.12
1.02
1.03

118.834 per $

Rs 48,30,000

3
12
3
12

1,01,129.682 $
$ 1129.682

b. Swap rate =
=
=

Forward Rate – Spot rate
118.34 120
¥ 1.166 / $
;

c.

Premium or Discount on ¥

=

(

100
3

) x 12

120 ; 118.834
118.834

=

(

=

3.9248 %

100
) x 12

3

d. Since ROI of ¥ is lower so ¥ is at premium
Q61

Spot Rate
ROI
US
Germany
Forward Rate (

$ 0.6560 per DM
6.5%
4.5%
)

(

=

Spot Rate
ROI
India
US

)

1:

1 : 0.065

=

0.6560 x

=

0.6560 x

=
Q62

1:

1 : 0.045
1.01625

3
12
3
12

1.01125

$ 0.65924 per DM

Rs 45.50 / $
8%
2%

a. USD will be at Premium as Interest rate in US is lower than Interest Rate in US
b.

Forward Rate (

)

(

=

1:

1 : 0.08

=

45.50 x

=

45.50 x

=

Rs 46.85 per $

1 : 0.2
1.04

Premium or discount on $

(

100
3

46.85 ; 45.50
45.50

=

(

=

5.93%

OR

6
12
6
12

1.01

;

c.

)

1:

6

) x 12
100
) x 12

1:

;

1 :

100

1 :

(

Q63

a.

Spot Rate
ROI
India
UK
Forward Rate

Forward Rate (

(

=

5.94%

=
=
=
=

Rs 85 / £
9%
?
Rs 87

100
) x 12

6

p
)

=

=

87
4

87

b.

1.04 ; 1.01
1.01

=

Let ROI in UK is

) x 12

6

12

)=

87 + 29 p

=

P

=

(

1:

)

1:

85 x

1:

85 x 1.03
87.55
87.55 ; 87

=

29
1.896552 %

Spot Rate
3 Month forward rate
ROI
London
US

=
=
=
=

$ 1.5654 / £
$ 1.7500 / £
2%
?

Forward Rate (

=

)

(

1:

)

1:

1:

1.7500

=

1.5654 x

1.7500 ( 1.005)

=
=

1.5654 x (

=

0.39135
49.41% p.a

1.75875
P

=

4
12
4
12

1 : 0.09

1 : 0.02

1.5654 + 0.39135p
0.19335

3
12

3
12

3
12

)

Q64

Spot rate
ROI
India
US
a.

b.

Rs 46.30 / $
10%
6%

Forward Rate (

)

(

=

1:

)

1:

=

46.30 x

=

46.30 x

=

Rs 47.199029 per $

1 : 0.6
1.05
1.03

Premium or Disc on $
;

(spot and forward rates) =

c.

6
12
6
12

1 : 0.10

(

100
3

) x 12

47.199 ; 46.30
46.30

=

(

=

3.88%

100
) x 12

6

Premium or Disc on $
(interest rates)
1:

;

1 :

100

1 :

=

Q65

(
1.05 ; 1.03
1.03

=

(

=

3.883%

100
) x 12

6

Spot Rate
=
3 month forward =

$ 2.450 / €
$ 2.650 / €

ROI

$

4%
2%

i.

Since ROI of US is higher, so $ currency will depreciate

=
=

;

=
=

) x 12

6

(
(

100
3

) x 12

2.450 ; 2.650
2.650

3
=
- 30.1887 %
Annualised discount on $ =
30.188%

100
) x 12

ii.

Forward Rate (

)

(

=

(according to interest rates)

1:

)

1:

1 : 0.04

=

2.450 x

=

2.450 x

=

1 : 0.2
1.01

3
12
3
12

1.005

$ 2.46218 per €

Forward rate according to rate of Interest is different from forward rate quoted in market,
so forward rates are not in equilibrium.
Q66
$ interest rate
(annually
compounded
FF interest rate
(annually
compounded)
Forward FF / $
Forward disc on FF
a. Forward Rate (

6 Months

1 year

11.5%

12.25%

?
(**1)

19.5%

? (**6)

20%

? (**3)
? (**4)

? (**5)
- 6.3%

7.5200
? (**2)

(

) =

7.5200

=

7.5200 (1 + x )

=

(1+x)
X

3 Months

=
=
=

b. Discount on FF(1 year)

7.05 x

1:

7.52
1.125 - 1
0.125 or 12.5%
=

=
Forward Rate (

)

1:
1 : 0.20

8.46
8.46

=

c.

1:

) (3 months)

(**1)

;
7.05 ; 7.52
7.52

x 100

6.25%

(**2)

(

=

1:
1:

)

√√1.195

=

7.05 x

=

7.05 x

=

FF 7.173 / $

√√1.115
1.045543
1.027587
(**3)

d. Discount on FF

=
;

100

(

6

) x 12

3

7.05 ; 7.173
7.173

=

(

=

6.859%

100
) x 12

3

(**4)

months
;

e. Discount on FF

=

100

(

) x 12

6

7.05 ;

f.

-0.063

=

-0.0315 F
F

=
=

Forward Rate (

(

6
7.05 – F
7.2792

) x 12

) (6 months)

=

(

7.2792

=

(1.093925)
X

Q67

Forward Rate (

)

=

(

1:
1:

46.50 x

=

46.50 x

√1.1225


(1 + x )
0.1967
Or 19.67%

=
=

) /

1 : 0.06
1.03

√ 1:

√1.1225

1 : 0.12

=

=

2

)

1:

√ 1:

=

1.093925

1:

7.05 x

=

1.0325106

(**5)

(
3
12
3
12

1:

(**6)

)

1:

1 : 0.14
/ 46.75 x

/ 46.75 x

1.035

1.015
1.0125
Rs 47.187192 / 47.788889 per $

1 : 0.05

3
12
3
12

Q68

An Indian company exported goods to US for $ 3,50,000 to be received in 3 months.
Since Indian company has to sell $, so relevant rate is BID rate.Indian company has two options.
1. To take forward market hedge
Indian company will book a forward contract today to sell $ 3,50,000 after 3 months
@ Rs 46.5 per $
Indian company will receive
3,50,000 x Rs 46.5
=
Rs 162,75,000
2. To take money market hedge
Forward Rate (

)

(

=

) /

1:

1 : 0.10

=

46 x

=

46 x

=

1:

1 : 0.06

(

3
12
3
12

1:

)

1:

1 : 0.12
/ 48 x

1 : 0.04

3
12
3
12

1.025

1.03
/ 46 x
1.015
1.01
Rs 46.453201 / 48.950495 per $
3,50,000

-

Indian company will borrow present value of 3,50,000 $ i.e

-

Indian company will sell $ 3,44,827.586 at today’s spot rate @ Rs 46/ $ and receive
3,44,827.586 x 46 = Rs 158,62068.956
Company will deposit Rs 158,62,068.956 @ 10% p.a for 3 months and receive
158,62,068.956 x 1.025 = Rs 162,58,620

-

1.015

= $ 3,44,827.586

Cash inflow in forward market hedge i.e Rs 162,75,000 is higher than cash inflow in money
market hedge i.e Rs 162,58,620. So forward market hedge is better.
Q69

Indian firm purchased machinery from US for $ 5,00,000, payment to be made in 4 months
Indian firm had to buy $, so relevant rate is ASK rate. Firm has 2 options
1. To take Forward market hedge
Firm will book a forward contract today to purchase $ 5,00,000 after 4 months @ Rs 46.45
per $
Firm will pay 5,00,000 x 46.45 =
Rs 232,25,000
2. To take Money market hedge
Forward Rate (

)

=

(

1:
1:

1 : 0.6

=

45.50 x

=

45.50 x

=

) /

1 : 0.04
1.02

(
4
12
4
12

1:

)

1:

1 : 0.09
/ 45.82 x

/ 45.82 x

1 : 0.03

1.03

1.0133
1.01
Rs 45.799342 / 46.727362 per $
5,00,000

-

Firm will deposit present value of 5,00,000 $, i.e

-

For this deposit firm will buy $ 4,95,049.5049 @ Rs 45.82 /$ and pay
4,95,049.5049 x 45.82 = Rs 226,83,168.3145

1.01

= $ 4,95,049.5049

4
12
4
12

-

For buying $ firm will borrow Rs 226,83,168.3145 @ 9% for 4 months. After 4 months
firm will pay 226,83,168.3145 x 1.03 = Rs 233,63,663

Since cash outflow in forward market hedge i.e 232,25,000 is lower than cash outflow in
money market hedge i.e Rs 233,63,663, so Forward market hedge is better.
Q70

UK firm sold goods worth € 2,50,000 to be received in 6 months. Since quotes are

£

, and firm

had to sell €, so relevant rate is BID rate. Firm has two options
1. To take forward market hedge
Firm will take a forward contract today to sell € 2,50,000 @ £ 1.2650 per €. Firm will receive
2,50,000 x 1.2650 = £ 3,16,250
2. To take money market hedge
Forward Rate (

)

(

=

=1.2635 x
=
=

1:

) /

1:

1 : 0.04
1 : 0.035

1.2635 x

6
12
6
12

1.02

(

1:
1:

)
1 : 0.06

/ 1.2680 x
/ 1.2680 x

1.0175
£ 1.266604 / 1.286738 per €

2,50,000

1 : 0.03
1.03
1.015

-

UK firm will borrow present value of € 2,50,000 i.e

-

Firm will sell € 2,45,700.2457 @ today’s spot rate i.e £ 1.2635 /€ and Receive
2,45,700.2457 x 1.2635 = £ 3,10,442.2604
Firm will deposit £ 3,10,442.2604 @ 4% p.a for 6 months and receive
3,10,442.2604 x 1.02 = £ 3,16,651.1056

-

1.0175

6
12
6
12

, € 2,45,700.2457

£ inflow in forward market hedge i.e £ 3,16,250 is lower than £ inflow in money market
hedge i.e £ 3,16,651.1056, so money market hedge is better.
Q71

A US firm imported goods for 8,00,000 DM to be paid in 3 months. Since US firm has to buy DM
and quotes are

$

, so relevant rate is ASK rate. US firm has 2 options

1. To take forward market hedge
US firm will book a forward contract today to buy 8,00,000 DM in 3 months @ $ 0.16200 / DM
US firm will pay 8,00,000 x 0.16200 = $ 1,29,600

2. To take money market hedge
Forward Rate (

)

=0.1650 x
= 0.1650 x
=

(

=

1 : 0.2
1 : 0.06
1.005

1:
1:
3
12
3
12

) /

(

1:
1:

)

1 : 0.03
/ 0.1680 x

1 : 0.04

3
12
3
12

1.0075

/ 0.1680 x

1.015
1.01
$ 0.1633743 / 0.167584 per DM
8,00,000

-

US firm will Deposit Present value of 8,00,000 DM i.e

-

To deposit DM firm will purchase 7,92,079.20792 DM @ $ 0.1680 / DM. Firm will pay
7,92,079.20792 x 0.1680 = $ 1,33,069.307
To buy DM firm will borrow $ 1,33,069.307 @ 3 % p.a for 3 months. After 3 months
firm will pay $ 1,33,069.307 x 1.0075 = $ 1,34,067.327

-

1.01

= 7,92,079.20792 DM

Since $ outflow in forward market hedge is lower than $ outflow in money market hedge,
so forward market hedge is better.
Q72

Indian firm imports goods from US firm worth $ 2,00,000, payment to be made in 3 months. Since
Quotes are

$

and Indian firm will buy $, so relevant rate is BID rate. Indian fir has 2 options

a. Take forward market hedge
Indian firm will book a forward contract today to buy $ 2,00,000 @ $ 0.0220 per Re. Firm will
pay

2,00,000
0.02193

= Rs 91,19,927

b. Take money market hedge
Forward Rate (

)

(

=

= .02217 x
= 0.02217 x
=

1:
1:

1 : 0.08
1 : 0.14
1.02

) /
3
12
3
12

(

1:

)

1:

1 : 0.09
/ 0.0222 x

/ 0.0222 x

1 : 0.12

1.0225

1.035
1.03
$ 0.021849 / 0.022038 per Re
2,00,000

-

Indian firm will deposit present value of $ @ 8% p.a . i.e

-

To deposit $ firm will buy $ 1,96,078.4313 @ spot rate of $0.02217 per Re
1,96,078.4313
0.02217

-

3
12
3
12

1.02

= $ 1,96,078.4313 $

= Rs 88,44,313.54533

To buy $ firm will borrow Rs 88,44,313.54533 @ 14% p.a and pay after 3 months
88,44,313.54533 x 1.035 = Rs 91,53,864.519
Re outflow in forward market hedge is lower than Re outflow in money market hedge,
so forward market hedge is better.

Q73

P ltd purchased goods worth $ 51 lac from US, to be paid in 3 months. Pltd want to ensure that
cost of $ 51 lac should not exceed Rs 22 crore. Since quotes are

$

, and Pltd has to buy $, so

relevant rate is ASK rate. Pltd has two options
1.

To take forward market hedge
Pltd will book a forward contract today to buy $ 51 lac after 3 months @ Rs 45 per $
P ltd will pay 51 lac x 45 = Rs 22,95,00,000

@. To take money market hedge
Forward Rate (

)

-

) /

1:

40 x

=

40 x

1 : 0.11
1.0325

3
12
3
12

(

1:

)

1:

1 : 0.16
/ 42 x

/ 42 x

1 : 0.08

3
12
3
12

1.04

1.0275
1.02
Rs 40.194647 / 42.823529 per $

Pltd will deposit present value os $ 51,00,000 for 3 months @ 8% p.a
i.e

-

1:

1 : 0.13

=

=
-

(

=

51,00,000
1.02

= $ 50,00,000

For deposit Pltd will buy $ 50,00,000 at spot rate of Rs 42 per $ and pay
50,00,000 x 42 = Rs 21,00,00,000
Pltd will borrow Rs 21,00,00,000 @ 16% p.a for 3 months. After 3 months Plt will pay
21,00,00,000 x 1.04 = Rs 21,84,00,000

Since Re outflow in money market is lower, so money market hedge is better.
Q74

Shoe company sold goods to German company for 50,000 DM to be received in 90 days.
a. Shoe company can hedge its Foreign exchange risk by
- Forward market hedge or
- Money market hedge or
- Currency option hedge or
- Currency future hedge
b. Spot rate
DM 1.71 per $
Forward rate
DM 1.70 per $
Since Forward rate is more than Spot rate, hence DM is at premium.
c.

According to interest rate parity high interest rates on currency are off set by forward discount
and low interest rates on currency are offset by forward premium
Premium on DM

=
=

;

x 100

1.71 ; 1.70

x 100 x

365

90
1.70
=
2.385%
Interest rate in Germany is lower than interest rate in US by 2.385 %

Q75

F Ltd a UK co. sold goods to US worth $ 1,97,000, to be received in 3 months. Quotes
$

are , and UK firm has to sell $ , So relevant rate is ASK rate. F Ltd has 2 options
£

1. To take Forward market hedge
F ltd will book a forward today to sell $ 1,97,000 @ $ 1.7063 per £.
Fltd will receive

1,97,000

£ 1,15,454.492

1.7063

2. To take money market hedge
Forward Rate (

)

(

=

= 1.7106 x
= 1.7106 x

1:
1:

1 : 0.06
1 : 0.125
1.015

) /

(

3
12
3
12

1:
1:

)
1 : 0.9

/ 1.7140 x

/ 1.7140 x

1 : 0.095

1.0225

1,97,000

= 1,92,665.036674 $

-

F ltd will borrow Present value of $ 1,97,000 i.e

-

F ltd will Purchase £ at today’s spot rate of $ 1.740 per £ and receive
1,92,665.036674

-

3
12

1.03125
1.02375
$ 1.683465 / 1.7119072 per £

=

1.740

3
12

1.0225

= £ 1,12,406.6725

F ltd will deposit £ received @ 9.5% p.a. F ltd will receive
1,12,406.6725 x 1.02375 = 1,15,076.330 £

Since £ receipts are higher in forward hedge than £ receipts in money market, so forward
market hedge is better

$

F ltd imported goods worth $ 2,93,000 payable after 6 months. Quotes are , since Fltd
£

has to Buy $, so relevant rate is BID rate. F ltd has 2 options
1. To take forward market hedge
F ltd will book a forward contract today to purchase $ 2,93,000 after 6 months
@ $ 1.6967 per £
F Ltd will pay

2,93,000
1.6967

= £ 1,72,688.159

2. To take money market hedge
Forward Rate (

)

(

=

= 1.7106 x

1 : 0.125

1:

)

1:

1 : 0.9
/ 1.7140 x

/ 1.7140 x

6
12

1 : 0.095

6
12

1.045

F Ltd will deposit present value of $ 2,93,000 for 6 months
i.e

-

6
12
6
12

1 : 0.06

(

1.0625
1.0475
$ 1.65827 / 1.709909 per £

=

-

) /

1:

1.03

= 1.7106 x

-

1:

2,93,000

2,84,466.0194 $

1.03

For deposit of $, firm will purchase $ 2,84,466.0194 at today’s
spot rate of $ 1.7106 per £. F ltd will pay
For buying $ firm will borrow £ 1,66,296.048 @ 12.5% for
6 months after 6 months F ltd will pay 1,66,296.048 x 1.0625

£ 1,66,296.048
£ 1,76,689.551

Since £ outflow is lower in forward market hedge, so forward market hedge is better.
Q76

UK co. is to receive 5,00,000 northland $ in 6 months.
If UK company take money market hedge
Forward Rate (

)

(

=

=

2.5 x

=

2.5 x

6
12
6
12

1.075

1.06
N$ 2.535377 per £

5,00,000

N$ 4,65,116.279

1.075

From N$, firm will buy £ @ spot rate
And receive

-

1 : 0.12

)

UK company will borrow present value of 5,00,000 N$ for 6 months.
i.e

-

1:

1 : 0.15

=

-

1:

4,65,116.279
2.5

firm will deposit £ 1,86,046.512 for 6 months
And rceive after 6 months 1,86,046.512 x 1.06

£ 1,86,046.512
£ 1,97,209.302

If Company does not take money market hedge
Company will buy N$ after 6 months @ spot rate after 6 months
1. If after 6 months £ gained 4%
Spot rate after 6 months will be 2.5 x 1.04, N$ 2.6 per £
Company will sell 5,00,000 N$ for

5,00,000
2.6

=

£ 1,92,307.692

Thus if after 6 months £ gained by 4%, firm will receive £ 1,92,307.692 for selling 5,00,000
N$ if no hedge is taken, against £ 1,97,209.302 if money market hedge is taken. Thus if
money market hedge is taken firm will gain 1,97,209.302 - 1,92,307.692
= £ 4901.61
2. If after 6 months £ lost 2%
Spot rate after 6 months will be , 2.5 x 0.98 ,N$ 2.45 per £
Company will buy 5,00,000 N$ for

5,00,000
2.45

=

£ 2,04,081.632

Thus if after 6 months £ lost by 2%%, firm will receive £ 2,04,081.632 for selling 5,00,000 N$
if no hedge is taken, against £ 1,97,209.302 if money market hedge is taken. Thus if money
market hedge is taken firm will loose 1,97,209.302 - 2,04,081.632
= £ 6872.331
3. If after 6 months £ remained stable
Spot rate after 6 months will be N$ 2.5 per £
Company will buy 5,00,000 N$ for

5,00,000
2.5

=

£ 2,00,000

Thus if after 6 months £ remains firm will receive £ 2,00,000 for selling 5,00,000 N$ if no
hedge is taken, against £ 1,97,209.302 if money market hedge is taken. Thus if money
market hedge is taken firm will loose 1,97,209.302 - 2,00,000
= £ 2790.698
Q77

st

on 1 march 07 B Ltd, a US firm, purchased an equipment from foreign firm for LC 9,00,000 due
st
on 31 may 07
st

Spot rate today (1 March) LC 10 / $
If Purchased today Bltd will pay for buying LC 9,00,000

9,00,000

$ 90,000

10

B Ltd has 3 options
st

a. To enter into forward contract today to Buy LC 9,00,000 @ LC 9/ $ on 31 May
B Ltd will pay

9,00,000
9

Loss to B ltd due to exchange fluctuation in option a (1,00,000 – 90,000)
Tax saving on loss 40% of $ 10,000
Thus net cost of equipment in option a
$ 1,00,000 - $ 4,000

$ 1,00,000
$ 10,000
$ 4,000
$ 96,000

b. To Borrow in $ and invest in LC (Money market Hedge)
Effective rate of interest
Interest rate
Tax on interest 40%
Interest rate after Tax (p.a)

$
12 %
4.8%
7.2%
3
12
3
12

1:0.048
Synthetic rate

(Bid)

10 x
10 x

1:0.072
1.012
1.018

LC
8%
3.2%
4.8%

=

LC 9.941061 / $

1. B Ltd will deposit PV of 9,00,000 LC for 3 months.
9,00,000
i.e B Ltd will deposit
1.012
2. For deposit B Ltd will purchase LC 8,89,328.06 @ LC 10 / $
8,89,328.06
B Ltd will pay
10
2. For purchase of LC, B Ltd will borrow $ 88,932.81 @ 7.2% p.a
After 3 months company will pay 88,932.81 x 1.018
Thus cost under money market hedge
c.

8,89,328.06 LC

$ 88,932.81
$ 90,533.60

$ 90,533.60

st

To buy LC 9,00,000 At spot rate on 31 may
st

B Ltd will buy LC 9,00,000 on 31 May @ LC 8 / $
9,00,000
B Ltd will pay
8
Loss to B Ltd
( 112500 – 90,000)
Tax saving on loss $ 22,500 x 0.4
Net cost of LC 9,00,000 ($1,12,500 – 9,000)

$ 1,12,500
$ 22,500
$ 9,000
$ 1,03,500

Cost Of LC 9,00,000 is least in option 2. So b ltd will Take hedge in money market for Foreign
exchange fluctuation
Q78

An Indian Co. has Receivable $ 2,00,000 in 3 months and payable £ 3,00,000 in 6 months
Incase on Receivable $ 2,00,000, Since company has to sell $ and quotes are

$

, Relevant rate

is Bid rate .company has 2 options
a. Forward market hedge
To book a forward contract today to sell $ 2,00,000 after 3 months @ Rs 44.75 / $
Company will receive
2,00,000 x 44.75
=
Rs 89,50,000

b. Money market hedge
Forward Rate (

)

=
=
=
-

-

1:

)

1:

1 : 0.09
43.65 x

1 : 0.0425

3
12
3
12

1.0225

43.65 x

1.010625
Rs 44.162894 / $

Indian company will borrow present value of 2,00,000 $ for 3 months.
i.e

-

(

=

2,00,000

$ 19,78,973.40

1.010625

From $, firm will buy Rs @ spot rate
And receive $ 19,78,973.40 x 43.65

Rs 863,82,189

firm will deposit Rs 863,82,189 for 3 months
And receive after 3 months 863,82,189 x 1.0225

Rs 883,25,788

Amount received In forward market hedge is more than amount received in Money market hedge,
so Forward market hedge is better
For payable £ 3,00,000, Company has to Buy £ and since quotes are

£

, so relevant rate is Ask

rate. Company has 2 options
a. Forward market hedge
Company will book a forward contract today to Buy 3,00,000 £ after 6 months @ Rs 71.80 / £
Company will pay 3,00,000 x 71.80 =
Rs 215,40,000
b. Money Market hedge
Forward Rate (

)

=
=
=
-

-

(

=

1:
1:

1 : 0.11
70.50 x

1 : 0.06

70.50 x

)
6
12
6
12

1.055

1.03
Rs 72.211165 / £

Company will deposit PV of £ 3,00,000, for 6 months
3,00,000
i.e company will deposit
£ 2,91,262.135
1.03
For deposit company will buy £ 2,91,262.135 @ Rs 70.50 / £
Company will pay 291262.135 x 70.50
Rs 205,33,980.5825
For buying £, company will borrow Rs 205,33,980.5825 for 6 months
Amount payable after 6 months 205,33,980.5825 x 1.055
Rs 216,663,349.514

Since Amount payable in forward market hedge is lower than amount payable in money market
hedge, so forward market hedge is better

Q79

A british firm has following cash transactions
Net amount receivable or payable after 1 month
a. Payment to creditors after 1 month

£ 1,20,000

b. Amount receivable after 1 month
Company has to Receive $ 1,78,500 after 1 month. Company will sell $ and
$
Buy £. Since quotes are
, So relevant quote is Ask rate. Company has 2 options
£
i.
Forward market hedge
Book a forward contract today to sell $ after 1 month at (1.5050 – 0.0050)
$ 1.5000 / £
1,78,500
Company will receive
£ 1,19,000
1.5
ii.

Money Market Hedge
Forward Rate (

)

(

=

=

1.5050 x

-

1
12
1
12

1.0075

1.006667
$ 1.5062454 / £

Company will borrow PV of $ 1,78,500 @ 9% p.a
1,78,500
i.e company will borrow
1.0075
Company will convert $ 1,77,171 in £ @ $ 1.5050/ £
Company will receive

)

1 : 0.08

1.5050 x

=

-

1:
1 : 0.09

=

-

1:

1,77,171
1.5050

Company will deposit £ 1,17,721 @ 8% p.a and receive
1,17,721 x 1.006667

$ 1,77,171

£ 1,17,721
£ 1,18,507

Since amount received in Forward market hedge is higher, so forward market hedge is
better
Thus £ receipts after 1 months
Net payment after 1 month

£ 1,19,000
£ 1,000

Net amount receivable or payable after 2 months
a. Dividend receipts after 2 months
b. Amount payable after 2 months
Company has to pay $ 5,00,000 after 2 months, Since company has to buy $
$

And Quotes are , so relevant rate is Bid rate. Company has 2 options
£

1. Forward market hedging
Company will book a forward contract today to buy $ after 2 months
@ $ (1.5000 + .10) = $ 1.5100 / £
5,00,000
Company will pay
=
£ 3,31,125 .83
1.5100

£ 1,00,000

2. Money Market hedge
Forward Rate (

)

(

=

=
=

-

-

)

1:

2
12
2
12

1 : 0.06
1.5000 x
1.5000 x

1 : 0.12
1.01

1.02
$ 1.4852941 / £

=
-

1:

Company will deposit PV of 5,00,000 $ for 2 months
5,00,000
@ 6% p.a i.e company will deposit
1.01
Company will Buy $ 4,95,050 $ at spot rate of
4,95,050
$ 1.5000 / £. Company will pay
1.5
Company will borrow 3,30,033 £ @ 12% p.a,. Amount
payable after 2 months
3,30,033 x 1.02

4,95,050 $

3,30,033.00 £
£ 3,36,634

Since amount payable in forward market hedge is lower than amount payable in money
market hedge, so forward market hedge is better
Thus amount payable after 2 months
£ 3,31,125
Net payments after 2 months
£ 2,31,125
Q80

An Indian exporter has to receive $ 1,000,000 after 3 months. Since company will sell $ and Quote
available is Rs/$ so relevant rate is Bid rate
Indian firm has 3 options
a. Borrow PV of Rupees and Sell $ 10,00,000 forward
-

Firm will book a forward contract today to sell 10,00,000 $ after 3 months @
(35.60 + 1.25) = Rs 36.85 / $
Firm will receive
Rs 360,85,000
Firm will borrow PV of Rs 360,85,000
360,85,000
i.e borrowings will be
Rs 349,06,892
3
1:0.135
12

Firm will repay Re loan when 10,00,000 Received and sold
b. Borrow $ and repay $ when $ payment is received after 3 months
-

Firm will borrow Present value of 10,00,000 $
10,00,000
i.e Firm will borrow
3
1:0.06

$ 9,85,221.67$

12

c.

Firm will convert $ borrowed in rupees at spot rate of Rs 35.60/$
Firm will receive 9,85,221.67 x 35.60
Rs 350,73,891

Allow a discount of 6.25% and receive payment today
After discount firm will receive 10,00,000 (1 – 0.0625)
Firm will sell $ 9,37,500 @ spot rate of Rs 35.60 per $
Firm will receive 9,37,500 x 35.60
Since Re amount received in 2

nd

option is highest , so 2

$ 9,37,500
Rs 333,75,000
nd

option should be accepted

Q81

Spot rate

Can $ 1.235 – 1.24 / $
1:0.095

Synthetic forward rate - 1.235 x

1:0.09

= 1.235 x
=

1.02375

3
12
3
12

/
/

3
12
3
12

1:0.105
1.24 x
1.24 x

1:0.08
1.02625

1.0225
1.02
can $1.236509 / 1.247598 per $

3 months forward rate can $ 1.255 / 1.26 per $
Since the quotes does not overlap each other, so arbitrage exist
Investor will borrow can $ and deposit $
- Suppose investor borrowed 1,00,000 can $ for 3 months @ 10.50% p.a
Amount payable after 3 months 1,00,000 x ( 1 + .105 x
-

-

3
12

)

1,00,000 x 1.02625
Investor will Purchase US $ from Can $ 1,00,000 @ can $ 1.24/ $
1,00,000
Investor will get
1.24
Investor will deposit $ 80,645 @ 8% for 3 months. After
3 months investor will get 80,645 x 1.02
He will sell $ 82,258 at forward rate of Can $ 1.255 / $ and receive
82,258 x 1.255

can $ 1,02,625
$ 80,645

$ 82,258
Can $ 1,03,233.87

After repayment of amount borrowed, net profit is (1,03,233.87 – 1,02,625)
Can $ 608.87
Q82

Spot rate

Rs 52.60/52.70 per £
1:0.08

3 month synthetic forward rate

52.60 x

1:0.05

= 52.60 x
=

1.02

3
12
3
12

/
/

1:0.08
52.70 x
52.70 x

1:0.05
1.02

3
12
3
12

1.0125
1.0125
Rs 52.98963 / 53.09037 per £

3 month forward rate
Rs 52.80 / 53.40 per £
Since synthetic forward rate and 3 month forward rate are overlapping each other, so
arbitrage opportunity does not exist
1:0.08
6 month synthetic forward rate

52.60 x

1:0.05

= 52.60 x

1.04

6
12
6
12

/
/

1:0.08
52.70 x
52.70 x

1:0.05

1.04

6
12
6
12

1.025
1.025
=
Rs 53.369756 / 53.47122 per £
6 month forward rate
Rs 53.10 / 53.45 per £
Since synthetic forward rate and 6 month forward rate are overlapping each other, so arbitrage
opportunity does not exist

Q83

Spot rate

£ 0.5711 – 0.5714 / $
1:0.105

Synthetic forward rate

=

0.5711 x

=

0.5711 x

=
3 month forward rate

1 : 0.0820
1.02625

3
12
3
12

/

/

1:0.11
0.5714 x

0.5714 x

1.0205
£ 0.574317 / 0.575601 per $

1 : 0.08

1.0275

3
12
3
12

1.02

£ 0.5747 / 0.5754 per $

Since synthetic forward rate and 3 month forward rate are overlapping each other, so arbitrage
opportunity does not exist
Q84

Spot rate

Can $ 0.665 per DM
1:0.09

Synthetic forward rate

0.665 x
=

3 month forward rate

0.665 x

1 : 0.07
1.0225

3
12
3
12

=

1.0175
can $ 0.6682678 per DM

=

Can $ 0.670 / DM

Synthetic rate is less than forward rate. Investor will borrow can $ and deposit DM
-

-

-

Q85

Suppose investor borrowed 1,00,000 can $ @ 9% p.a for 3 months
Amount payable after 3 months 1,00,000 x 1.0225 = can $ 1,02,250
He will convert 1,00,000 Can $ into DM @ can $ 0.665 / DM
1,00,000
He will receive
= 1,50,375.938 DM
0.665
He will deposit DM 1,50,375.938 DM @ 7% for 3 months and receive
1,50,375.938 x 1.0175 = DM 1,53,007.5187 DM
He will purchase DM at 3months forward rate of can$ 0.670 / DM
He will receive 1,53,007.5187 x 0.670 = Can $ 1,02,515.0375 per DM
After repayment of amount borrowed, net profit is
1,02,515.0375 – 1,02,250
=

265.0375 can $

John a foreign exchange dealer in Paris buys £ 1,00,000 , 90 days forward In Zurich
@ $ 1.9477 / £
John will pay 1,00,000 x 1.9477
$ 1,94,770
He sells £ 1,00,000 90 day forward in Montreal @ $ 1.9512 per £
John will receive 1,00,000 x 1.9512
$ 1,95,120
Net profit ( 1,95,120 – 1,94,770)

$ 350

Q86

An investor borrowed $ 10,00,000 @ 5% in US for 1 year
Amount payable after 1 year
$ 10,50,000
From 10,00,000 $, he purchased £ @ spot rate of $ 1.5 / £
He received

10,00,000
1.5

= £ 6,66,667

He deposited £ 6,66,667 @ 8% p.a in UK for 1 year
He received 6,66,667 x 1.08 = £ 7,20,000
From £ 7,20,000 he purchased $ at forward rate of $ 1.48 / £
He received 7,20,000 x 1.48 = $ 10,65,600
After Repayment of amount borrowed, Net profit is 10,65,600 $ - 10,50,000 = $ 15,600
Q87

a.

Indian Importer bought a machinery for $ 1,00,000 payable after 3 months. He has 3
options
Option 1

Currency option

Call option gives right to buy $ and Put option gives right to sell $. Since Importer has to
buy $, so he will buy call option, to buy $ 1,00,000 after 3 months @ Rs 49.20 / $
Statement of Cost of 1,00,000 $
Premium paid 1,00,000 x 0.40
On due date importer will buy 1,00,000 $ and pay
1,00,000 x 49.20
Total payment

40,000
49,20,000
49,60,000

Option 2
Forward market hedge
Importer will book a forward contract today to purchase $ 1,00,000 @ Rs 49.90 / $
Importer will pay

1,00,000 x 49.90

49,90,000

Option 3
No Hedging
He will buy 1,00,000 $ after 3 months @ spot rate after 3 months of Rs 51 / $
Amount payable 1,00,000 x 51
51,00,000
Since cash outflow in hedging through currency option is least, so currency option is
better
b.

Indian exporter exported goods for $ 2,00,000 to be received after 4 months. Exporter
has 3 options
Option 1
Currency option
Call option gives right to buy $ and put option gives right to sell $. Since exporter has to
sell $, so he will buy a put option to sell 2,00,000 $ after 3 months @ Rs 45.40 / $.
Statement of Net amount received
Amount of premium paid
2,00,000 x 0.30
On due date exporter will sell 2,00,000 $ @ 45.40 / $
Amount received

Rs
60,000
90,80,000
90,20,000

Option 2
Forward market hedge
Exporter will book a forward contract today to sell 2,00,000 $ after 4 months
@ Rs 44.90 / $
Amount received
2,00,000 x 44.90
89,80,000
Option 3
No hedging
Exporter will sell 2,00,000 $ at spot rate after 6 months @ Rs 44.95 / $
He will receive
2,00,000 x 44.95

89,90,000

Since cash inflows in hedging through currency option is highest, so currency option is
better
c.

PQR Ltd has to pay $ 2,50,000 in 4 months to a US firm. PQR has 3 options.
Option 1
Currency options
Call option gives right to buy Re and Put option gives Right to sell Re. Since PQR has to
buy $ ( i.e sell Re), So PQR will buy Put option and Buy $ after 4 months
@ $ 0.02198 / Re
Statement of Amount paid
Premium payable
$ 0.00015 / Re
2,50,000
PQR has to sell
, Rs 113,73,976
0.02198
Premium payable
113,73,976. x $ 0.00015 = $ 1706.0964
1706.0964
Amount paid for paying premium
Rs 76,782.016
0.02222
On due date he will buy 2,50,000 $ and pay
Rs 113,73,976
Total amount payable
Rs 114,50,758
Option 2
forward market hedge
PQR will book a forward contract today to buy 2,50,000 $ at $ 0.02183 / Re
2,50,000
He will pay
Rs 114,52,130.096
0.02183
Option 3
No hedging
PQR will buy 2,50,000 $ after 4 months at spot rate after 4 months
2,50,000
@ $ 0.02178 / Re
0.02178

Rs 114,78,421

Since amount payable in currency option is least, so currency option is better
d. Indian company has to receive $ 1,50,000 after 3 months. Indian company has 3 options
Option 1
Hedging through currency options
Call option gives right to buy Re and Put option gives right to sell Re. since Company has to
sell $ ( i.e buy Re), so company will buy call option and sell $ after 3 months
@ $ 0.02264 / Re

Statement of net amount Receivable
Premium payable
$ 0.00025/Re
1,50,000
He will buy
Rs 66,25,441.7
0.02264
Premium payable 66,25,441.7 x 0.00025 = $ 1,656.3604
Amount paid for $ 1,656.3604 at spot rate of $ 0.02273 per Re
Amount received from selling $
Amount receivable

Rs 72,871.113
Rs 66,25,441.7
Rs 65,52,570.6

Option 2
Forward Market Hedge
Company will book a forward contract today to sell $ 1,50,000 @ $ 0.2290 / Re
1,50,000
Company will receive
Rs 65,50,218.3
0.02290
Option 3
Company will sell 1,50,000 $ at spot rate after 3 months @ 0.023200 / Re
1,50,000
Company will receive
Rs 64,65,517.2
0.023200
Since amount receivable in currency option is highest, so currency option hedge is better.
Q88

a.

th

Sun Ltd, a UK co. has to receive $ 2,40,000 on 30 sept.Sun ltd is considering to hedge
this receipt through currency options
Call option gives right to buy £ and Put option gives right to sell £. Since UK co has to sell
$ and buy £, so UK co. will buy call option to sell to sell $ 2,40,000 @ $ 1.60 / £ at a
premium of £ 600 per contract
No. of contracts
Size of each contract is

£ 30,000

UK co. has to sell $ 2,40,000 @ $ 1.60 / £, i.e Co. will buy
No. of contracts to be taken by UK. Co.

2,40,000

1,50,000

£ 1,50,000
5

30,000

Statement of amount to be received
Premium paid
5 contracts x £ 600
Amount received on due date
Net amount received
b.

1.60

£ 3,000
£ 1,50,000
£ 1,47,000

If on due date Spot rate is
i.

$ 1.20 / £
Since MP < Exercise Price, So call option will not be exercised.
Company will sell $ 2,40,000 in market

Statement of amount to be received
Premium paid
5 contracts x £ 600
2,40,000
Amount received on due date
1.2
Net amount received

£ 3,000
£ 2,00,000
£ 1,97,000

ii.

$ 1.60 / £
Since MP = EP, Co. will be indifferent whether to exercise the call option or sell $
in market
Statement of amount to be received
Premium paid
5 contracts x £ 600
£ 3,000
Amount received on due date
1,50,000
Net amount received
£ 1,47,000

iii.

$ 2.00 / £
Since MP > EP, Co. will exercise call option and sell $ 2,40,000 to writer
Statement of amount to be received
Premium paid
5 contracts x £ 600
2,40.000
Amount received on due date
1.60
Net amount received

Q89

£ 1,50,000
£ 1,47,000

Currency Market Arbitrage
a. Since $ is expected to depreciate, So for Arbitrage profit Romesh may either buy a call or
write a Put
b. If Romesh Bought a 30 day call
Premium paid
On due date, he will buy € @ $ 1.1 / € and sell € in market
@ $ 1.220 / €. Net amount received ( 1.220 – 1.1 )
Profit on arbitrage
If Romesh wrote a Put
Premium received
On due date Put holder will not exercise Put option as $ is
expected to depreciate and € will appreciate, i.e on due date
MP > EP, so put holder will sell € in market.
Arbitrage Profit

Q90

£ 3,000

$ 0.085
$ 0.120
$ 0.035
$ 0.110

.
$ 0.110

An Indian Exporter has to Receive $ 1,00,000 in 90 days. Indian company has 2 options
Option 1

No hedging
Company will sell $ 1,00,000 after 90 days, at spot rate after
90 days i.e @ Rs 46.50/$
Company will receive 1,00,000 x 46.50

Rs 46,50,000

Option 2

Hedging through currency options
Company will buy a put option at a premium of Re 1 /$ which gives the company,
right to sell $ @ Rs 48 / $ after 90 days
Statement of amount to be received
Premium paid
1,00,000 x 1
Rs 1,00,000
Amount received on due date
Rs 48,00,000
Net amount received
Rs 47,00,000
Since amount received in Currency option is higher so currency option is better

b.

If Spot rate after 90 days is Rs 47.50 / $
Since MP < EP, so Put will be exercised, and net amount received will be Rs 47,00,000
If spot rate after 90 days is rs 48.50
Since MP > EP , Company will not exercise put option and sell, $ in market
Statement of amount to be received
Premium paid
1,00,000 x 1
Rs 1,00,000
Amount received on due date
Rs 48,50,000
Net amount received
Rs 47,50,000
Inthis case hedging through currency options is not viable.

d.

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