Chapter - 2: Foreign Exchange Exposure and Risk Management

Chapter - 2
FOREIGN EXCHANGE EXPOSURE

AND RISK MANAGEMENT
Learning Outcomes
After going through the chapter student shall be able to understand
determination
Foreign currency market
– Forward, futures, options and swaps
© CA Nagendra Sah (www.fmguru.org)

Page 2.2 STRATEGIC FINANCIAL MANAGEMENT
APPLICATION OF TWO WAY QUOTE; PREMIUM/DISCOUNT

Question No. 1A [June-2009-Old-6 Marks]
The following 2-way quotes appear in the foreign exchange market:
Spot 2-months forward In CMA June-2015, wrongly
printed as 1 Month
/US $ 46.00/46.25 47.00/47.50
Required:
(i) How many US dollars should a firm sell to get 25 lakhs after 2 months?
(ii) How many Rupees is the firm required to pay to obtain US $ 2,00,000 in the spot market?
(iii) 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?
[CMA-June-2018-New-6M] [CMA-June-2015-Old-6M]
Ans: (i) US $ 53191.489; (ii) 92,50,000; (iii) Better to encash after 2 Month.
Question No. 1B
Given the following quotes for per unit of each currency against US dollar, on two different dates:
British pound 1.5398 1.6385
Canadian dollar 0.6308 0.6591
EMU euro 0.9666 1.0835
Japanese yen 0.008273 0.008343
Mexican peso 0.1027 0.0917
Swedish krona 0.1033 0.1179
What is the rate of appreciation or depreciation of each currency over the period?
[CMA-RTP-Dec-2014-Old]
Ans: Pound = +6.41%; Canadian dollar = +4.49%. Euro = +12.09%; Yen = +0.85%; Peso = -10.71%; Krona = +14.13%.
 TEST YOUR KNOWLEDGE

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 1.1
An extract from exchange rate list of a Kolkata based bank is given below:
/¥: 0.3992/0.4002
(i) How many yen will it cost for a Japanese tourist visiting India to purchase 2,500 worth of jackfruit?
(ii) How much will Mr. Basu in Kolkata have to spend in rupees, to purchase a Sony camcorder worth yen
1,25,000?
[CMA-TP-Dec2013-Old]
Ans: (i) ¥ 6263; (ii) 50025

FOREIGN EXCHANGE EXPOSURE AND RISK Page 2.3
MANAGEMENT
PREMIUM/DISCOUNT, LOSS/GAIN, FORWARD CONTRACT HEDGE
Question No. 2A [SM-Old]
Fleur du lac, a French co, has shipped goods to an American importer under a letter of credit arrangement,
which calls for payment at the end of 90 days. The invoice is for $1, 24,000. Presently the exchange rate is
5.70 French francs to the $ if the French franc were to strengthen by 5% by the end of 90 days, what would
be the transactions gain or loss to exporter in French francs?
If it were to weaken by 5%, what would happen?
[CMA Compendium] [CMA-June-2013-Old-5M]
Ans: If Strengthen by 5%: Loss = 33,653.6 FRF
If Weaken by 5%: Gain = 37,200 FRF
Question No. 2B [Nov.-2004-Old-4 Marks]

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: (i) Rate of discount quoted by the Bank
(ii) The probable loss of operating profit if the forward sale is agreed to.
[CMA-Compendium]
Ans: (i) Annual Discount = 5.26%; (ii) Probable loss =  30,000
Question No. 2C [Nov-2003-Old-6 Marks]

A company operating in Japan has today effected 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.
[CMA-June-2013-Old-5M] [CMA-MTP-June-2014-Old-5M] [CMA Compendium]
Ans: Expected exchange loss = 3.33 Lakh; If hedged by a forward contract actual loss =
2.73 Lakh; i.e. reduced by 0.6 lakh
Question No. 2D [May-2008-Old-8 Marks] [RTP-Nov-2012-Old]

A company is considering hedging its foreign exchange risk. It has made a purchase on 1st. January, 2018 for
which it has to make a payment of US $ 50,000 on September 30, 2018. The present exchange rate is 1 US $ = 
40. It can purchase forward 1 US $ at  39.
The company will have to make a 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:
(i) If the exchange rate on September 30, 2018 is  42 per US $.
(ii) If the exchange rate on September 30, 2018 is  38 per US $.
[CMA Compendium]
Ans: (i) Due to forward cover, Gain = 1,08,075; (ii) Due to forward cover, Loss = 91,925

Question No. 2E [Nov-2003-Old-10 Marks]

ABC Co. has taken a 6 month loan from their foreign collaborators for US Dollars 2 millions. Interest payable on
maturity is at LIBOR plus 1.0%. Current 6-month LIBOR (London Interbank Offering rate) is 2%.
Enquiries regarding exchange rates with their bank elicit the following information:
Spot USD 1  48.5275
6 months forward  48.4575
(i) What would be their total commitment in Rupees, if they enter into a forward contract?
(ii) Will you advise them to do so? Explain giving reasons.
[CMA Compendium]
Ans: (i) Value of Commitment =  9,83,68,725
(ii)If own expectation- that dollar will depreciate more than quoted- do nothing; If firm has no specific view –
cover the risk; it would be unwise to expect continuous depreciation of the dollar. The US Dollar is a stronger
currency than the Indian Rupee based on past trends Hence it would be advisable to enter forward contract.
Question No. 2F [RTP-Nov-2015/May-2014-Old] [Nov-2007-Old-8 Marks]

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 USA Europe
Variable cost per unit 225 395 510
Export sale price per unit Yen 650 US$10.23 Euro 11.99
Receipts from sale due in 90days Yen78,00,000 US$1,02,300 Euro 95,920
Foreign exchange rate information:
Yen/ US$/ 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.
[CMA-MTP-June-2014-Old-8M] [CMA Compendium]
Ans: (i) If foreign exchange risk is hedged, ratio = 19.56%
(ii) If foreign exchange risk is not hedged, ratio = 19.17%
Question No. 2G [SM-New] [May-2003-Old-6 Marks]
In March 2018, the multinational industry makes the following assessment of dollar rates per British Pound to
prevail as on 1.9.2018.
$/Pound Probability
1.6 0.15
1.7 0.20
1.8 0.25
1.9 0.20
2.0 0.20
1.00
(i) What is the expected spot rate for 1.9.2018?
(ii) If as of march, 2018, the 6-month forward rate is $ 1.80, should the firm sell forward its pound receivable due
in September 2018?
[CMA-June-2008-Old-4Mks] [CMA Compendium]
Ans: (i) $ 1.81; (ii) Firm do not sell pound under forward contract.

MANAGEMENT
’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 2.1 [RPT-May-2011-Old]
Arnie operating a garment store in US has imported garments from Indian exporter of invoice amount of 
138,00,000 (equivalent to $ 3,00,000). The amount is payable in 3 months. It is expected that the exchange rate
will decline by 5% over 3 months period. Arnie is interested to take appropriate action in foreign exchange
market. The three month forward rate is quoted at 44.50
You are required to calculate expected loss which Arnie would suffer due to this decline if risk is not hedged. If
there is loss, then how he can hedge this risk.
Ans: Expected loss = $15,789, By taking forward cover loss can reduce to $10,112
Question No. 2.2 [SM-Old]

A UK company, is due to receive 5,00,000 Northland dollars in six month’s time for goods supplied. The company
secedes to hedge its currency exposure by using the forward market. The spot rate of exchange is 2.5 Northland
dollars to the pound. The forward rate of exchange is 2.5354 Northland dollars to the pound.
Calculate how much UK company actually gains or losses as a result of the hedging transaction if, at the end of the
six months, the pound, in relation to the Northland dollar, has (i) gained 4%, (ii) lost 2% or (iii) remained stable.
Ans: (i) Gain = £ 4,900; (ii) Loss = £ 6,874; (iii) Loss = £ 2,792.
Question No. 2.3 [RTP-Nov-2010-Old]

An Automobile company in Gujarat exports its goods to Singapore at a price of SG$ 500 per unit. The company
also imports components from Italy and the cost of components for each unit is € 200. The company’s CEO
executed an agreement for the supply of 20,000 units on January 01, 2018 and on the same date paid for the
imported components. The company’s variable cost of producing per unit is  1,250 and the allocable fixed
costs of the company are 1,00,00,000.
The exchange rates on 1 January 2018 were as follows
Spot /SG$ 33.00/33.04
/€ 56.49/56.56
Mr. A, the treasury manager of company is observing the movements of exchange rates on a day to day basis and
has expected that the rupee would appreciate against SG$ and would depreciate against €.
As per his estimates the following are expected rates for 30th June 2018
Spot /SG$ 32.15/32.21
/€ 57.27/57.32
You are required to find out:
(a) The change in profitability due to transaction exposure for the contract entered into.
(b) How many units should the company increases its sales in order to maintain the current profit level for the
proposed contract in the end of June 2018.
Ans: (a) Profit will decrease by 115,40,000 (ii) Company would increase its sale from 20,000 to 23,434 units
Question No. 2.4 [Nov-2009-Old-12 Marks] [May-2015-Nepal-Old-8M]

M/s Omega Electronics 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:
/Euro 51.50/55

/S$ 27.20/25
After six months the exchange rates turn out as follows:
/Euro 52.00/05
/S$ 27.70/75
(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
/Euro 51.75/80
/S$ 27.10/15
(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.
Ans: (1) Decline in Profit due to transaction exposure =  360,000;
(2)(i) Decline in profit due to transaction exposure = 1152,000; (ii) Decline in profit due to operating exposure =  1146900.
SWAP POINT AND BROKEN PERIOD FORWARD RATE

Question No. 3A [Extracted from June-2009-Old]
Considering following rates, for $/£ what are the implied swap points in cent for spot over 3 months?
Spot rate: £/$ 0.7630/0.7670
3 months forward rate: £/$ 0.7650/0.7700
Use rates in multiples of 0.0005
Ans: 0.55/0.35 Cent
Question No. 3B [Nov-2016-Old-5M]
On April 3, 2016, a Bank quotes the following:
Spot exchange Rate (US $ 1) INR66.2525 67.5945
2 months’ swap points 70 90
3 months’ swap points 160 186
In a spot transaction, delivery is made after two days. Assume spot date as April 5, 2016
Assume 1 swap point = 0.0001, You are required to:
(i) ascertain swap points for 2 months and 15 days. (i.e. For June 20, 2016),
(ii) determine foreign exchange rate for June 20, 2016, and
(iii) compute the annual rate of premium/discount of US$ on INR, on an average rate
Ans: (i) 115/138; (ii) INR 66.2640/67.6083; (iii) 0.0833%/0.0980%
SETTLEMENT OF TRANSACTION AT DIFFERENT DATES

Question No. 4A [SSM-2016] [Nov-2014-Old-8M]
Electronics Corp. Ltd. your customers, have imported 5, 000 cartridges at a landed cost in Bombay, of US $
20 each. They have the choice of paying for the goods immediately or in three months time. They have a
clean overdraft limit with you where 18% p.a. rate of interest is charged. Calculate which of the following
methods would be cheaper to your customer.
(a) Pay in three months time with interest at 15% and cover the exchange risk forward for three months.
(b) Settle now at the current spot rate and pay interest to the overdraft for three months. The rates are as
follows:
Bombay  /$ Spot: 31.25 - 31.55, 3 month swap: 25/35
[CMA-MTP-June-2015-Old-4M] [CMA-June-2006-Old-8 Marks]
Ans: (a)  33,09,625; (b)  32,96,975
MANAGEMENT
Question No. 4B [RTP-Nov-2017-Old] [SM-Old]
U.S. Co., purchased 1, 00,000 Mark’s worth of machines from a firm in Dortmund, Germany the value of the
dollar in terms of the mark has been decreasing. The firm in Dortmund offers 2/10, net 90 terms. The spot
rate for one mark is dollar 0.55; the 90 days forward rate is $0.56.
(a) Compute the $ cost of paying the account within 10 days.
(b) Compute the $ cost of buying a forward contract to liquidate the account in 90 days.
(c) The differential between part (a) and part (b) is the result of the time value of money (the discount for
prepayment) and protection from currency value fluctuation. Determine the magnitude of these
components.
Ans: (a) $ 53,900; (b) $56,000; (c) Time value of money = $1120; protection from devaluation = $980

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 4.1 [Nov-2011-Old-6M]
An import house in India has bought goods from Switzerland for CHF 10, 00,000. The exporter has given the
Indian company two options:
Pay immediately the bill for CHF 10,00,000.
Pay after 3 months, with interest @ 5%p.a.
The importer bank charges 14% on overdrafts. If the exchange rates are as follows, what should the company
do?
Spot (/CHF): 30.00/30.50
3 months (/CHF): 31.10/31.60
[CMA-Dec-2003-Old-8M] [As CMA-Dec-20020-Old-8M]
Ans: Immediate payment =  315,67,500; pay at 3 month =  319,95,000
Question No. 4.2 [SSM-2016] [May-2015-Old-8M] [Nov-2012-Old-8M] [MTP-May-2014-Old-8M]

A firm is contemplating import of a consignment from the USA for a value of US dollars 10,000. The firm
requires 90 days to make payment. The supplier has offered 60 days interest free credit and is willing to offer
additional 30 days credit at an interest rate of 6% p.a. The bankers of the firm offer a short loan for 30 days
at 9% p.a. The bankers quotation for foreign exchange is:
Spot USD 1 =  46.00
60 days forward 1 USD =  46.20
90 days forward 1 USD = 46.35
You are required to advice the firm as to whether it should pay the supplier in 60 days or avail the supplier’s
offer of 90 days credit. Show your calculations.
[CMA-June-2018-New-10M]
Ans: pay in 60 days =  465,465; pay in 90 days = 465,818

MONEY MARKET HEDGE AND FORWARD HEDGE

Question No. 5A [Nov-2008-Old-6M] [Nov-2009-Old-7M] [RTP-Nov-2009-Old]
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.
[CS-June-08-12M] [CMA Compendium]
Ans: Receipt under money Market hedge = £ 2, 17,902;
Receipt under forward hedge = £ 2, 16,852
Question No. 5B [SM-New] [Nov-2008-New-6 Marks] [RTP-Nov-2009] [RTP-Nov-2012]
An Indian exporting firm, Rohit and Bros., would be cover itself against a likely depreciation of pound sterling.
The following data is given:
Receivables of Rohit and Bros : £500,000
Spot rate : 56.00/£
Payment date : 3-months
3 months interest rate : India: 12 per cent per annum
: UK: 5 per cent per annum
What should the exporter do?
Ans: Amount receivable = 284,83,941; Net gain = 4,83,941
Question No. 5C [RTP-May-2010-Old]
Wenden Co is a Dutch-based company which has the following expected transactions.
One month: Expected receipt of £2,40,000
One month: Expected payment of £1,40,000
Three months: Expected receipts of £3,00,000
The finance manager has collected the following information:
Spot rate (£ per €) : 1.7820 ± 0.0002
One month forward rate (£ per €) : 1.7829 ± 0.0003
Three months forward rate (£ per €) : 1.7846 ± 0.0004
Money market rates for Wenden Co:
Borrowing Deposit
One year Euro interest rate: 4.9% 4.6
One year Sterling interest rate: 5.4% 5.1
Assume that it is now 1 April.
Required:
(a) Calculate the expected Euro receipts in one month and in three months using the forward market.
(b) Calculate the expected Euro receipts in three months using a money-market hedge and recommend whether a
forward market hedge or a money market hedge should be used.
Ans: (a) Expected euro receipt: in 1 m = €56,079, in 3 m = €1,68,067.

MANAGEMENT
(b) Expected euro receipt in 3 m = €167,999.
Question No. 5D [SM-Old]

The finance director of P Ltd., has been studying exchange rates and interest rates relevant to India and USA.
P Ltd. has purchased goods from the US Co. at a cost of $51 lakhs payable in dollars in three months time. In
order to maintain profit margins the finance director wishes to adopt, if possible, a risk-free strategy that will
ensure that the cost of the goods to P Ltd. is no more than  22 Crores.
Exchange rates ( /Dollars)
Spot 40-42
1 month forward 41-43
3 months forward 42-45
Interest rate (available to P Ltd):
India USA
Deposit rate (%) Borrowing rate (%) Deposit rate (%) Borrowing rate(%)
1 month 13 15 7 10
3months 13 16 8 11
Calculate whether it is possible for P .Ltd to achieve a cost directly associated with this transaction of no
more than  22 Crores by means of a forward hedge, or money market hedge.
[As CMA-June-2006-8M]
Ans: payment under forward hedge =  22.95 crore;
Payment under Money market hedge =  21.84 crore
Question No. 5E [SM-Old] [As RTP-Nov-2008-old] [Must Revise]

On 1st March 2018, the B Ltd. bought from a foreign firm electronic equipment that will require the payment
of LC 9, 00, 000 on 31 st May 2018. The spot rate on 1 st March 2018, is LC 10 per dollar; the expected future
spot rate is LC 8 per dollar; and the 90 days forward rate is LC 9 per dollar.
The US interest rate is 12%, and the foreign interest rate is 8%. The tax rate for both countries is 40%.
The B Ltd. is considering three alternatives to deal with the risk of exchange rate fluctuations.
(a) To enter the forward market to buy LC 9,00,000 at the 90 days forward rate in effect on 31 st May 2018.
(b) To borrow an amount in dollars to buy the LC at the current spot rate. This money is to be invested in
government securities of the foreign country; with the interest income, it will equal LC 9, 00,000 on
31st May 2018.
(c) To wait until 31st May 2018, and buy LCs at whatever spot rate prevails at that time.
Which alternatives should the B Ltd. follow in order to minimize its cost of meeting the future payment in
LCs? Explain.
Ans: (a) Forward Mkt. = $ 96,000; (b) Money Mkt. = $ 90,534; (c) wait until … = $1,03,500

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 5.1
MN, a UK company, has a substantial portfolio of its trade with American and German companies. It has
recently invoiced a US customer the sum of $ 50 ,00,000, receivable in one year’s time. MN finance director
is considering two methods of hedging the exchange risk:
Method 1: Borrowing present value of $ 5 million now for one year, converting the amount into sterling, and
repaying the loan out of eventual receipts.

Method 2: Entering into a 12-month forward exchange contract with the company’s bank to sell the $5
million.
The spot rate of exchange is £ 1 = US $ 1.6355,
The 12-month forward rate exchange is £ 1 = US $ 1.6125,
Interest rates for 12 months are USA 3.5%; UK 4%.
You are required to calculate the net proceeds in sterling under both methods and advise the company.
[CMA-June-2004-8M]
Ans: Rcpt. under Method 1 = £ 3071937.99; Rcpt. Under Method 2 = £ 3100775.19
Question No. 5.2 [RTP-May-2015-Old] [RTP-Nov-2013-Old]

Columbus surgical Inc. is based in US has recently imported surgical raw materials from the UK and has been
invoiced for £ 4,80,000 payable in 3 months. It has also exported surgical goods to India and France.
The Indian customer has been invoiced for £1,38,000 payable in 3 months and the French customer has been
invoiced for € 5,90,000 payable in 4 months.
Current spot and forward rates are as follows:
£/US$
Spot: 0.9830 – 0.9850
Three months forward: 0.9520 – 0.9545
US$/€
Spot: 1.8890 – 1.8920
Four months forward: 1.9510 – 1.9540
Current money market rates are as follows:
UK: 10.0% - 12.0% p.a.
France: 14.0% - 16.0% p.a.
USA: 11.5% - 13.0% p.a.
You as Treasury Manager are required to show how the company can hedge its foreign exchange exposure using
forward markets and Money markets hedge and suggest which the best hedging technique is.
Ans: (i) £ Exposure: Forward = US$ 3,59,244; MMH=£ 3,33,658 (ii) € Receipt: Forward = US$ 1,151,090; US$ 1,098,639
CROSS RATE
Question No. 6A
The following quotes are available.
Spot ($/Euro) 0.8385/0.8391
3-m swap point 20/30
Spot ($/Pound) 1.4548/1.4554

3-m swap points 35/25
Find the 3-m (€/£) outright forward rates:
[CMA-Dec-2012/June-2013-Old-5M] [CMA-PTP-June-2015-Old-5M] [CMA-PTP/MTP-Dec-2014-Old-5M]

Ans: €/£ = 1.7234/1.7286;

MANAGEMENT
Question No. 6B
Your bank wants to calculate Rupee. TT selling rate of exchange for DM since a deposit of DM 1,00,000 in
a Foreign Currency Non Resident A/C has matured, when:
EURO 1 = DM 1.95583 (locked in rate)
EURO 1 = US$ 1.02338/43
US $ 1 =  48.51/53
What is the Rupee TT selling rate for DM Currency?
[CMA-Dec-2002-4M]
Ans: Rupee TT selling rate = 25.3944
Question No. 6C [May-2014-5M] [As May-2013-5M] [Nov.-2005-old-4M] [As RTP-June-2009-old]
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 ignores brokerage.
[CS-June-09-4M] [CMA Compendium]
Ans: Cover rate HK$ 1 = 5.62434 – 5.647074; Gain =  5,29,260;
Question No. 6D [MTP-May-2015] [Nov-2013- 5 M]

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.
Ans: London: Profit = 7,100 ;New York: Profit = 4800
In examination it was wrongly printed as London
Question No. 6E
[SM-New] [As SM-Old] [May-2015-Nepal-5M] [May-2014-8M] [Nov-2011-5M] [May-2005-old-8M]
On January 28, 2018 an importer customer requested a bank to remit Singapore Dollar (SGD) 25,00,000 under an
irrevocable LC. However, due to bank strikes, the bank could effect the rem ittance only on February 4, 2018. The
interbank market rates were as follows:
January, 28 February 4
Bombay US$1 =  45.85/45.90 45.91/45.97
London Pound 1 = US$ 1.7840/1.7850 1.7765/1.7775
Pound 1 = SGD 3.1575/3.1590 3.1380/3.1390
The bank wishes to retain an exchange margin of 0.125%. How much does the customer stand to gain or lose due
to the delay? (Calculate rate in multiples of .0001)
[CMA Compendium]

Ans: Loss to customer due to strike = 2,28,250

Question No. 6F [RTP-Nov-2010-Old]
Somu Electronics imported goods from japan on july 1st 2018, of ¥ 1 Million, to be paid on 31st, December 2018.
Mr. X, the treasury manager collected the following exchange rates on July 01, 2018 from the bank.
Delhi /$ Spot 45.86/88
6 months forward 46.00/03
Tokyo ¥/$ Spot 108/108.50
6 month forward 110/110.60
In spite of fact that the forward quotation for ¥ was available through cross currency rates, Mr. X, the treasury
manager purchased spot $ and converted $ into ¥ in Tokyo using 6 months forward rate.
However, on 31st December, 2018 /$ spot rate turned out to be 46.24/26.
You are required to calculate the loss or gain in the strategy adopted by Mr. X by comparing the notional cash
flow involved in the forward cover for yen with the actual cash flow of the transaction.
Ans: Loss = 2,091 [Hint: Cash flow of forward purchasing ¥ = 418454.50;
Cash flow of forward purchasing $ in spot market and converting into ¥ 420545.50]
Question No. 6G [June-2009-Old-6M]

You have following quotes from Bank A and Bank B:
Bank A Bank B
Spot USD/CHF 1.4650/55 USD/CHF 1.4653/60
3 months 5/10
6 months 10/15
Spot GBP/USD 1.7645/60 GBP/USD 1.7640/50
3 months 25/20
6 months 35/25
Calculate:
(i) How much minimum CHF amount you have to pay for 1 million GBP spot?
(ii) Considering the quotes from Bank A only, for GBP/CHF what are the implied swap Points for Spot over 3
months?
Ans: (i) CHF 25.866 Lakhs; (ii) 28/12

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 6.1 [RTP-Nov-2009-old]
You sold € 1 million value spot to your customer at € 1= 54.60 and covered yourself in Singapore market on the
same day when the exchange rate was as under:
Spot US$ 1 = € 0.7373/0.7375
Local interbank US$ 1 = 40.1850/40.1950
(Brokerage paid 2,000)
Calculate the cross rate nearest to the fourth decimal and ascertain profit or loss in the transaction to the nearest
rupee.
Ans: Cross rate =  54.5165; Profit = 81,500
Question No. 6.2
[SM-Old] [May-2014-Old-8M] [Nov.-1998-8marks] [As RTP-June-2009-Old] [MTP-May-2015-6M]
X Ltd. an Indian company has an export exposure of 10 million (100 lakhs) yen, value September end. Yen is not
directly quoted against Rupee. The current spot rates are USD/INR = 41.79 and USD/JPY = 129.75.

MANAGEMENT
It is estimated that Yen will depreciate to 144 level and Rupee to depreciate against dollar to 43.
Forward rate for September 2018 USD/Yen = 137.35 and USD/INR = 42.89.
You are required to:
(i) to calculate the expected loss if hedging is not done. How the position will change with company taking
forward cover?
(ii) If the spot rate on 30th September, 2018 was eventually USD/Yen = 137.85 and USD/INR = 42.78, is the
decision to take forward cover justified?
Ans: (i) Expected loss = 2.347 Lacs; if forward cover taken loss can be reduced to 0.981 lacs,
(ii)Receipt under Forward cover = 31.227 Lacs; decision to purchase forward cover is justified
Question No. 6.3

Considering the following quotes
Spot (Euro/Pound) = 1.6543/1.6557
Spot (Pound/NZ$) = 0.2786/0.2800
(i) Calculate the % spread on the Euro/Pound Rate
(ii) Calculate the % spread on the Pound/NZ$ Rate
(iii) The maximum possible % spread on the cross rate between the Euro and NZ$.
[CMA-June-2013-5M] [CMA-MTP-June-2014-5M]
Ans: (i) 0.085%; (ii) 0.50%; (iii) 0.59%
Question No. 6.4
An Indian customer who has imported equipment from Germany has approached a bank for booking a forward
Euro contract. The delivery is expected six months from now.
The following rates are quoted:
($/Euro) spot 0.8453/0.8457
6m-Swap points 15/20
/$ spot 46.47/46.57
6m-Swap points 20/30
What rate the bank will quote, if it needs a margin of 0.5%?
[CMA-PTP-June-2015-6M] [CMA-PTP-Dec-2014-6M]
Ans: The Bank would quote =  39.73 + 0.5% =  39.93/€
Question No. 6.5
Bharat’s subsidiary in India, Emami, procures most of its soaps from a Japanese company. Because of the shortage
of working capital in India, payments terms for the Indian importers are typically 180 days or more. Emami wishes
to hedge a 8.5 million Japanese Yen payable. Although options are not available on the Indian Rupee (,) forward
rates are available against the Yen. Additionally, a common practice in India is for companies like Emami, to work
with a currency agent who will in this case lock in the current spot exchange for a 4.85% fee. Using the following
data, recommend a hedging strategy.
Spot rate, USD/JPY Yen 120.60/$
Spot rate, USD/INR 47.75/$
180-day forward rate, JPY/INR 0.4166/Yen
Expected spot exchange rate in 180 days 0.3846/Yen
180-day yen investment rate 1.5%
180-day rupee investment rate 8.0%
Cost of capital 12.0%
[CMA-TP-Dec-2013-New-10 Marks]

Question No. 6.6

Angel Ltd., an export customer who relied on the interbank rate of /$ 46.50/10 requested his banker to purchase
a bill for USD 80,000. What is the rate to be quoted to Angel Ltd. if the banker wants a margin of 0.08%?
[CMA-MTP-Dec-2014-2M]
Ans: Spot bid rate = 46.50 – 0.04 =  46.46
Question No. 6.7 [May-2018-Old-5M]

An importer customer of your bank wishes to book a forward contract with your bank on 3rd September for sale
to him of SGD 5, 00,000 to be delivered on 30th October.
The spot rates on 3rd September are USD/ 49.3700/3800 and USD/SGD 1.7058/68. The swap point are:
USD/ USD/SGD
Spot/September 0300/0400 1st month forward 48/49
Spot/October 1100/1300 2nd month forward 96/97
Spot/November 1900/2200 3rd month forward 138/140
Spot/December 2700/3100
Spot/January 3500/4000
Calculate the rate to be quoted to the importer by assuming an exchange margin of 5 paisa.
Ans:
INTEREST RATE PARITY THEORY

Question No. 7A [May-2004-Old-9M] [Nov-2012-Old-5M]
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%.
(i) do you expect United States Dollar to be at a premium or at discount in the Indian forward market;
(ii) what is the expected 6-months forward rate for United States Dollar in India; and
(iii) What is the rate of forward premium or discount?
[CMA Compendium]
Ans: (i) Dollar will be at premium; (ii) Forward rate ( /$) =46.85;
(iii) Forward Premium = 5.934%
Question No. 7B [Nov-2000-Old-8M]

The following table shows interest rates for the United States dollar and French francs. The spot exchange rate is
7.05 francs per dolla r Complete the missing entries:
3 Months 6 Months 1 Year
Dollar interest rate
11½% 12¼% ?
(annually compounded)
Franc interest rate
19½ ? 20%
(annually compounded)
Forward franc per dollar ? ? 7.5200
Forward discount per franc
? 6.3% ?
per cent per year
[CMA-Dec-2013-Old-10M]
Ans: 3 Month: FR = 7.17; FD = 6.7%; 6 Month: Franc IR = 19.8%; FR = 7.28; 1 Year: Dollar IR = 12.5%, FD = 6.25%

MANAGEMENT
Question No. 7C [May-2001-Old-10M]
Shoe Company sells to a wholesaler in Germany. The purchase price of a shipment is 50,000 deutsche marks with
term of 90 days. Upon payment, Shoe Company will convert the DM to dolla r The present spot rate for DM per
dollar is 1.71, whereas the 90-day forward rate is 1.70.
You are required to calculate and explain:
(i) If Shoe Company were to hedge its foreign-exchange risk, what would it do? What transactions are
necessary?
(ii) Is the deutsche mark at a forward premium or at a forward discount?
(iii) What is the implied differential in interest rates between the two countries?
(Use interest-rate parity assumption).
Ans: (i) Hedging through Forward Market, Money Market Operation or currency option & Futures;
(ii)Forward Premium on DM = 2.353%; (iii) interest rate differential = 2.353%

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
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 ?
[CMA Compendium]
Ans: 3 Month Forward rate: DM 1 = $ 0.6592
Question No. 7.2 [May-2016-8M]
ABC Ltd. of UK has exported goods worth Can $ 5,00,000 receivable in 6 months. The exporter wants to hedge the
receipt in the forward market. The following information is available:
Spot Exchange Rate Can $ 2.5/£
Interest Rate in UK 12%
Interest Rate in Canada 15%
The forward rates truly reflect the interest rates differential. Find out the gain/loss to UK exporter if Can $ spot rates
(i) declines 2%, (ii) gains 4% or (iii) remains unchanged over next 6 months.
Ans: (i) Gain: 1,161; (ii) Loss: 11,094; (iii) Loss: 2,761
PURCHASING POWER PARITY OR INFLATION RATES PARITY

Question No. 8A
(i) A Laptop Bag is priced at $ 105.00 at New York. The same bag is priced at 4,250 in Mumbai. Determine
Exchange Rate in Mumbai.
(ii) If, over the next one year, price of the bag increases by 7% in Mumbai and by 4% in New York, determine
the price of the bag at Mumbai and-New York? Also determine the exchange rate prevailing at New York
for 100.
(iii) Determine the appreciation or depreciation in Rs. in one year from now.
[CMA-RTP-June-2015]
Ans: (i) 40.4762; (ii) 4,547.50; $109.20 & 100 = $2.4013; (iii) Discount 2.805%

Question No. 8B
[SM-New] [May-2015-Nepal-Old-(5+3)=8M] [Nov-2008-Old-(4 +4)=8M] [part(i)-May-2010-Old-4M]
[RTP-Nov-2009/May-2010/May-2013-Old]
(i) 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.
(ii) 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?
Ans: (i) Expected rate after 1 Y =  44.87548; after 3 Y =  47.9762; (ii) FR 1 US $ = UK £ 0.7645

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 8.1 [RTP-May-2018-New] [RTP-Nov-2017] [Nov-2013-8M]
Your bank’s London office has surplus funds to the extent of USD 500000/- 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% pa.a.
New York 8% p.a.
Frankfurt 3% p.a
The market rates in London for US dollar and Euro are as under;
London on New York
Spot 1.5350/90
1 month 15/18
2 month 30/35
3 month 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 the investment be made & what will be the net gain (to the nearest pound) to the bank on the
invested funds?
RETURN FROM FOREIGN SECURITY

Question No. 9A [SM-NEW] [May-2012-5 Marks]
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.
Ans: 14.24%

MANAGEMENT
’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
An Indian investor invests in a bond in America. If the price of the bond in the beginning of the period is $ 100 and
it is $ 105 at the end of the period. The coupon interest during the period is $ 7. The US dollar appreciates during
this period by 3%. Find the return on investment in terms of home country currency.
Ans: Return on investment = 15.36%
GEOGRAPHICAL ARBITRAGE
Question No. 10A [Nov-2008-old-6M]
Followings 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 arbitrageur has USD1,00,00,000. Assuming that there are no transaction costs, explain whether there is any
arbitrage gain possible from the quoted spot exchange rates.
[CMA Compendium] [CMA-PTP-June-14-Old-5M]
Ans: Arbitrage gain = USD 1,12,968
Question No. 10B [RTP-Nov-2014-Old]
Followings are the spot exchange rates quoted at three different forex markets:
USD/INR 59.25/59.35 in Mumbai
GBP/INR 102.50/103.00 in London
GBP/USD 1.70/1.72 in New York
The arbitrageur has USD1,00,00,000. Assuming that bank wishes to retain an exchange margin of 0.125%,
explain whether there is any arbitrage gain possible from the quoted spot exchange rates..
Ans: $4765.38

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 10.1
Assuming no transaction costs, suppose £1 = $2.4110 in New York, $1 = FF 3.997 in Paris, and FF 1 =
£0.1088 in London. How would you take profitable advantage if you had £ 50,000?
[CMA-PTP-June-15-Old-2M]
Ans: Profit = £ 2,424.01
Question No. 10.2
Spot rate (Frank furt) 1$ =1.3579-1.3585DM
Spot rate (New York) 1 DM = 0.7149-0.7295$
You have 1,00,000 DM what amount of profit you can make from arbitrage? Assume Brokerage is 0.2%
Ans: Arbitrage gain = DM 502.33 [Hint: Adjust brokerage on all conversion]
Question No. 10.3
Calculate Arbitrage Profit in following two different situations.
(i) Arbitrageur has £10,000; and
(ii) Arbitrageur has ¥1,00,000
Exchange rates of different markets are:

Tokyo: £1 = 90.00/91.00
UK: £1 = ¥150.00/151.00
Mumbai: ¥100 = 62.00/62.50
Ans: (i) £219.78; (ii)
COVER INTEREST ARBITRAGE

Question No. 11A [May-2018-New-8M] [May-2006-old-8M] [Nov-2014-Old-8M]
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.
Canadian Dollar 9% p.a.
What operations would be carried out to take the possible arbitrage gains?
[CMA Compendium]
Ans: Arbitrage gain = Can $ 26 [Raise $ loan and Invest in DM; Assumed can $ loan = 10,000]
Question No. 11B

Assuming that no transaction cost or taxes exist, do the following data offers arbitrage profit opportunity?
If so, how will the arbitrage transaction be carried out? Assume that arbitrageur can borrow up to $1 million.
Three month interest rate in the United States : 8% per annum
Three month interest rate in Germany : 5% per annum
Current spot exchange rate : €1.0114/$
Three month forward exchange rate : €1.0101/$
[CMA-June-2005-Old-10M]
Ans: Arbitrage profit $6,197
Question No. 11C [SM-Old]
Following are the rates quoted:
/BP 52.60/70 Interest Rates India London
3m forward 20/70 3 months 8% 5%
6m forward 50/75 6months 10% 8%
Verify whether there is any scope for covered interest arbitrage if you borrow rupees.
Ans: Arbitrage not possible either for 3 month period or for 6 month period. [loss 3 month = -558; 6 month = -211]
[Assuming borrowing = 1,00,000]
Question No. 11D [RTP-May-2012-Old]

True Blue Cosmetics Ltd. is an old line producer of cosmetics products made up of herbals. Their products are
popular in India and all over the world but are more popular in Europe.
The company invoice in Indian Rupee when it exports to guard itself against the fluctuation in exchange rate. As
the company is enjoying monopoly position, the buyer normally never objected to such invoices. However,
recently, an order has been received from a whole-seller of France for FFr 80,00,000. The other conditions of the
order are as follows:
(a) The delivery shall be made within 3 months.
(b) The invoice should be FFr.
MANAGEMENT
Since, company is not interested in losing this contract only because of practice of invoicing in Indian Rupee. The
Export Manger Mr. E approached the banker of Company seeking their guidance and further course of action.
The banker provided following information to Mr. E.
(a) Spot rate 1 FFr =  6.60
(a) Forward rate (90 days) of 1 FFr = 6.50
(b) Interest rate in India is 9% and in France is 12%.
Mr. E entered in forward contract with banker for 90 days to sell FFr at above mentioned rate.
When the matter comes for consideration before Mr. A, Accounts Manager of company, he approaches you.
You as a Forex consultant are required to comment on:
(i) Whether there is an arbitrage opportunity exists or not.
(ii) Whether the action taken by Mr. E is correct and if bank agrees for negotiation of rate, then at what forward
Rate Company should sell FFr to bank.
Ans: Yes; (ii) 6.55
Question No. -11E
Consider the following:
Spot rate = $0.75/DM
Forward rate (one year) = $0.77/DM
Interest rate (DM) = 7% p.a.
Interest rate ($) = 9% p.a.
Is there any arbitrage possibility if there is no transaction cost? Suppose now that transaction costs in the foreign
exchange market equal 0.25% per transaction. Do unexploited covered arbitrage profit opportunities exist?
Ans: $ 3.04

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 11.1 [May-2016-Old-8M [Nov-2006-old-5M]
Spot rate 1 US $ = 48.0123
180 days Forward rate for 1 US $ = 48.8190
Annualised interest rate for 6 months – Rupee = 12%
Annualised 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.
[CMA-Dec-2017-New-8M] [As CMA-Dec-2007-6M] [CMA Compendium]
Ans: Yes, US $ 206.95 or  10,103
Question No. 11.2
Given the following information:
Spot rate : 46.88/$
3 month forward rate : 47.28/$
3 month interest rate in USA : 7% p.a.
3 month interest rate in India : 9% p.a.
Assuming no transaction cost or taxes exist, what operation would be carried out to take the possible arbitrage
gain?
Assume 10 million/$ 10 million borrowings (as the case may be) to explain your answer
[CMA-Dec-2006-Old-8 Mks]
Ans: Arbitrage gain = 0.0366 million
Question No. 11.3

Syntex Ltd. has to make a $5 mill payment in three months time. The required amount in dollars is available with
syntax ltd. The management of the company decides to invest them for three months and following information is
available in this context:
The $ deposit rate is 9% pa
The sterling pound deposit rate is 11% pa
The spot exchange rate is $1.82/£
The three month forward rate is $1.80/£
Answer the following questions
(i) Where should the company invest for better returns?
(ii) Assuming that the interest rates and the spot exchange rate remain as above, what forward rate would
yield an equilibrium situation?
(iii) Assuming that the US interest rate and the spot and forward rates remain as above, where should the
company invest if the sterling pound deposit rate were 15% per annum
(iv) With the originally stated spot and forward rates and the same dollar deposit rate, what is the
equilibrium sterling pound deposit rate?
[CS-Dec-2005-Old-15M] [CMA-MTP-June-2014-Old-8M]
Ans: (i) Invest in $ & borrow in £; (ii) Fair FR: £1 = $1.811; (iii) Invest in £; (iv) pound rate = 13.54%
Question No. 11.4
The annual interest rate is 5% in the United States and 8% in the UK. The spot exchange rate is £/$ = 1.50
and forward exchange rate, with one year maturity, is £/$ = 1.48. In view of the fact that the arbitrager can
borrow $ 10, 00,000 at current spot rate what would be the arbitrager profit or loss?
[CMA-MTP-June-2015/PTP-Dec-2014-Old-6M] [CMA-Dec-2004-Old-10M]
Ans: Arbitrager gain = $ (approx)
Question No. 11.5 [RTP-May-2012-Old]
[Solve after studying Continuous compounding Concept in Time Value Chapter]
The risk free rate of interest rate in USA is 8% p.a. and in UK is 5% p.a. The spot exchange rate between US $
and UK £ is 1$ = £ 0.75.
Assuming that interest is compounded on daily basis then at which forward rate of 2 year, there will be no
opportunity for arbitrage.
Further, show how an investor could make risk-less profit, if two year forward price is 1 $ = 0.85 £.
Given e-0.06 = 0.9413 & e-0.16 = 0.852, e0.16 = 1.1735, e-0.1 = 0.9051
NOSTRO, VOSTRO AND LORO ACCOUNT

Question No. 12A
An Indian bank wants to fund their Nostro A/C with US Correspondence bank by $5,00,000 against INR when
Inter bank rate is $1=47.20/50. The deal is struck and overseas bank’s Vostro A/C That is being maintained with
the Indian Bank will be credited by … … … … …
Ans: £ 267,500
Question No. 12B [MTP-May-2015-Old] [Nov-2013-Old-4 M]
XYZ bank Amsterdam, wants to purchase rupees 25 million against £ for funding their Nostro account and they
have credited LORO account with /bank of London, London. Calculate the amount of £’s credited.
Ongoing inter-bank rates are per $, 61.3625/3700 & per £, $1.5260/70
Ans: £2,66,980
MANAGEMENT
Question No. 12C [SM-NEW] [Nov-2005-old-7M] [RTP-Nov-2008-old] [RTP-May-2013-Old]
You as a dealer in foreign exchange have the following position in Sw iss Francs on 31st October, 2018:
Swiss Francs
Balance in the Nostro A/c Credit 1,00,000
Opening Position Overbought 50,000
Purchased a bill on Zurich 80,000
Sold forward TT 60,000
Forward purchase contract cancelled 30,000
Remitted by TT 75,000
Draft on Zurich cancelled 30,000
What steps would you take, if you are required to maintain a credit Balance of Swiss Francs 30,000 in the Nostro
A/c and keep as overbought position on Swiss Francs 10,000?
[CMA-MTP-June-2014-Old-6M]
Ans: Buy Spot TT for CHF 5000 and also Buy Forward TT for CHF 10,000

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 12.1
A New York bank wants to fund their account called Vostro A/C, with an Indian bank by 10 million. What
dollar amount the New York bank would deposit in the Indian bank’s account called Nostro A/C maintained in
New York when Inter Bank rate is 1$ = 44.50-70
[CMA-June-2004-Old-2M]
Ans: $ .2247 mill
Question No. 12.2 [SSM-2016] [MTP-May-2015-Old] [RTP-Nov-2013-Old]

ABN Amro Bank Amsterdam wants to purchase 15 million against US$ for funding their Vostro account with
Canara Bank New Delhi. Assuming the interbank rates of US$ is 51.3625/3700, what would be the rate Canara
Bank would quote to ABN-Amro Bank? Further if the deal is struck what would be the equivalent US$ amount.
Ans: Rate: 51.3625; Amount = $292041.86
Question No. 12.3 [MTP-Nov-2014-Old-5M]
You as a forex dealer have dealing position in your account in London
Particulars £
Opening Balance (Oversold) 187,500
Purchase of cheques not credited to the account 164,000
Outstanding Forward Contracts
Sales 4,096,500
Purchases 3,651,500
DD issued not yet presented for payment 610,040
Bill purchased in hand not due for 1,442,820
What must you do to square up your position?
Ans: Sale £364280 (Approx. £364000) to Square off position

LC ARRANGEMENT
Question No. 13A
[Nov-2008-old-6M] [Nov-1996-old-12M] [MTP-Nov-2014-Old-5M] [RTP-May-2015-Old]
Sun Ltd. in planning to import an 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 irrecoverable 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 per 12 months.
Advise the company whether the offer from the foreign branch should be accepted?
[CMA Compendium]
Ans: Option 1: Pmt = 1092.02 Lakh; Option 2: Pmt = 1006.28 Lakh.

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Beta Ltd. is planning to import a multi-purpose machine from Japan at a cost of 7,200 lakh yen. The company
may avail loans at 15%interest per annum with quarterly rests with which it can import the machine. The
company has also an offer from Tokyo branch of an India based bank extending credit of 180 days at 2% per
annum against opening of an irrecoverable letter of credit.
Additional information:
Present exchange rate 100 = 360 yen
180 day’s forward rate 100 = 365 yen
Commission charges for letter of credit at 2 per cent per 12 months.
Advise the company whether the offer from the foreign branch should be accepted?
Ans: Loan option: Pmt = 2152.81; LC: pmt = 2013.58
PARALLEL LOAN/BACK TO BACK LOAN

Question No. 14A [SM-Old]
MCDonnoughs Hamburger Company wishes to lend $ 5, 00,000 to its Japanese subsidiary. At the same time
a Yasufuku Heavy Industries is interested in making a medium-term loan of approximately the same amount
to its US subsidiary. The two parties are brought together by an Investment Bank for making parallel loans.
MCDonnoughs will lend $ 5, 00,000 to US subsidiary of Yasufuku for 4 Years @ 13 per cent (compounded
annually). Principal and interest are payable only at the end of next 4 years in dolla r
Yasufuku will lend to the Japanese subsidiary of McDonnoughs 70 million yen for 4 years at 10%
(compounded annually). The current exchange rate is 140 Yen per dollar. However the dollar is expected to
decline by 5 yen per dollar per year for each of next 4 years
(a) What will be the dollar equivalent of Principal and interest payments to Yasufuku at the end of 4 years?
(b) What total Dollar McDonnoughs will receive after 4 years from the payment of principal and interest
on its loan by the US subsidiary of Yasafuku?
(c) Which party is better off with this deal? What would happen if the yen did not change in value?
Ans: (a) $ 854,058 (b) $815,237 (c) Yasufuku will be better off.

MANAGEMENT
CANCELLATION OF FORWARD CONTRACT [BEFORE/ON DUE DATE]
Question No. 15A [SM-New] [SSM-2016]
You as a banker has entered into a 3 month’s forward contract with your customer to purchase AUD 1,00,000 at
the rate of  47.2500. However after 2 months your customer comes to you and requests cancellation of the
contract. On this date quotation for AUD in the market is as follows:
Spot 47.3000/3500 per AUD
1 month forward 47.4500/5200 per AUD
Determine the cancellation charges payable by the customer.
Ans:  27000
Question No. 15B [SM-New] [SSM-2016]

On 15th January 2015 you as a banker booked a forward contract for US$ 250000 for your import customer
deliverable on 15th March 2015 at  65.3450. On due date customer request you to cancel the contract.
On this date quotation for US$ in the inter-bank market is as follows:
Spot 65.2900/2975 per US$
Spot/ April 3000/ 3100
Spot/ May 6000/ 6100
Assuming that the flat charges for the cancellation is  100 and exchange margin is 0.10%, then determine the
cancellation charges payable by the customer.
Ans: Cancellation charges payable = 30,100
Question No. 15C

X Ltd. a UK company, arranges on 1 January with a US supplier for purchase of goods costing US $ 96,000.
X Ltd. is supposed to pay 1 st July. X Ltd. arranged a forward exchange contract with its bank to Purchase $ 96,
000 six months hence.
Later on the goods were found defective. As per agreement reached between X Ltd. and US company, X Ltd.
was supposed to pay the US company only $ 50,000. X limited purchased only $ 50,000 though the contract
was for $ 96,000. Calculate the amount in sterling pound that X Ltd has to pay to its bank on the basis of
following information:
1 January Rate per sterling pound
Spot $ 1.5145 - 1.5155
6 month forward 0.95 - 0.85 cent premium
1 July spot $ 1.5100 - 1.5110
[CMA-TP-Dec2013-10M]
Ans: £ 33,343.97


’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 15.1 [Nov-2015-5M]
A bank enters into a forward purchase TT covering an export bill for Swiss Francs 1,00,000 at 32.4000 due 25th
April and covered itself for same delivery in the local inter bank market at  32.4200. However, on 25th March,
exporter sought for cancellation of the contract as the tenor of the bill is changed.
In Singapore market, Swiss Francs were quoted against dollars as under:
Spot USD 1 = Sw. Fcs. 1.5076/1.5120
One month forward 1.5150/ 1.5160
Two months forward 1.5250 / 1.5270
Three months forward 1.5415/ 1.5445
and in the interbank market US dollars were quoted as under:
Spot USD 1 =  49.4302/.4455
Spot / April .4100/.4200
Spot/May .4300/.4400
Spot/June .4500/.4600
Calculate the cancellation charges, payable by the customer if exchange margin required by the bank is 0.10% on
buying and selling
Question No. 15.2 [Nov-2004-old-4M]

A customer with whom the Bank had entered into 3 months forward purchase contract for Swiss Francs
1,00,000 at the rate of  36.25 comes to the bank after two months and requests cancellation of the contract.
On this date, the rates are:
Spot CHF 1 =  36.30 36.35
One month forward 36.45 36.52
Determine the amount of Profit or Loss to the customer due to cancellation of the contract.
Ans: Loss to the Customer =  27,000

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 SF 1 =  27.30 / 27.35
One month forward SF 1 =  27.45 / 27.52
What is the loss/gain to the customer on cancellation?
Ans: Loss to the Customer =  2,700

MANAGEMENT
CANCELLATION/SQUARE OFF ON EXCHANGE
Question No. 16A [June-2009-Old-6M] [MTP-May-2014-Old-5M] [Good Q.]
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:
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?
Ans: Rupee Loss = 109,201.5

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 16.1 [RTP-Nov-2014-Old]
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:
Spot US $ 1 INR 61.4300/4500
Spot US $ 1 EURO 1.4250/4350
What will be the gain or loss in the transaction?
Ans: Gain 214042.00
EXTENSION OF FORWARD CONTRACT [BEFORE/ON DUE DATE]

Suppose you as a banker entered into a forward purchase contract for US$ 50,000 on 5th March with an export
customer for 3 months at the rate of  59.6000. On the same day you also covered yourself in the market at 
60.6025. However on 5th May your customer comes to you and requests extension of the contract to 5thJuly. On
this date (5th May) quotation for US$ in the market is as follows:
Spot 59.1300/1400 per US$
Spot/ 5th June  59.2300/2425 per US$
Spot/ 5thJuly  59.6300/6425 per US$
Assuming a margin 0.10% on buying and selling, determine the extension charges payable by the customer and
the new rate quoted to the customer.
Rates rounded to 4 decimal in multiples of 0.0025
Ans: Exchange difference payable to the customer is 17,500. (Rate 59.3017 rounded off to 59.3000)
Rate for booking new contract: 59.5704 (rounded off to 59.5700)

Question No. 17B [SM-New] [SSM-2016]

Suppose you are a banker and one of your export customer has booked a US$ 1,00,000 forward sale contract for 2
months with you at the rate of  62.5200 and simultaneously you covered yourself in the interbank market at 
62.5900. However on due date, after 2 months your customer comes to you and requests for cancellation of the
contract and also requests for extension of the contract by one month. On this date quotation for US$ in the market
was as follows:
Spot  62.7200/62.6800
1 month forward  62.6400/62.7400
Determine the extension charges payable by the customer assuming exchange margin of 0.10% on buying as well
as selling. Rates rounded to 4 decimal in multiples of 0.0025
Ans: Cancellation charges payable = 26,750; New booking at 62.5775 (rounded off to 0.0025)
Question No. 17C [May-2017-Old-8M] [RTP-May-2015-Old] [MTP-May-2014-Old-5M]

An exporter requests his bank to extend the forward contract for US$ 20,000 which is due for maturity on 31st
October, 2018 for a further period of 3 months. He agrees to pay the required margin for such extension of the
contract.
Contracted rate – US$ 1 = 62.32
The US Dollar quoted on 31-10-2018:
Spot – 61.5000/61.5200
3 months’ Discount – 0.93%/0.87%
Margin money for buying and selling rate is 0.45% and 0.20% respectively.
(i) The cost to the exporter in respect of the extension of the forward contract and
(ii) the rate of new forward contract.
Ans: (i) Difference in favour of customer = 13600; (ii) New Rate: 60.6538

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 17.1
An Indian customer approaches a bank for a two-month forward contract to help it to settle AUD 200,000 payable
maturing on 01/04/18. The bank quotes a rate of 35.40/AUD. On 01/04/18, the customer requests the bank to
extend the contract for one more month. If the rates prevailing on 1/4/18 are as follows, what should the bank
charge for extending the contract?
Spot : 35.20/AUD
One-month forward :  35.50/AUD
Ans: Cancellation Charges, Payable by customer i.e.  (35.20 - 35.40) × 2,00,000 = - 40000
New contract: Now Bank would buy forward value one month @ 35.50/AUD for delivery to customer on due date.
Question No. 17.2 [RTP-Nov-2009-old] [RTP-May-2010-New]

On 30th June 2009 when a forward contract matured for execution you are asked by an importer customer to
extend the validity of the forward sale contract for US$ 10,000 for a further period of three months.
Contracted Rate US$1 = 41.87
The US Dollar quoted on 30.6.2009
Spot 40.4800/40.4900
Premium July 0.1100/0.1300
MANAGEMENT
Premium August 0.2300/0.2500
Premium September 0.3500/0.3750
Calculate the cost for your customer in respect of the extension of the forward contract and also calculate new
forward contract to be quoted to your customer.
Rupee values to be rounded off to the nearest Rupee.
Margin 0.080% for Buying Rate
Margin 0.25% for Selling Rate
Ans: Cost to the customer =  14,200; Forward rate to be quoted to the customer is US $ 1 =  40.97
Question No. 17.3

NBA Bank Ltd. Transacted on August 19, 2018 the following:
(i) Sold $ 10,00,000 two months forward to Alpha Manufacturing Co. Ltd. at 44.50
(ii) Purchase €10,00,000 two months forward from Beta Trading Co. Ltd. at 47.20;
On October 19, 2018, both the customers approached the bank. Alpha Manufacturing Co. wants the forward
contract to be cancelled while beta Trading co wants the contract to be extended by one month. The following
exchange rates prevailed on that day:
/$ /€
Spot 44.60/65 47.75/85
One month Forward 44.75/85 48.00/20
Based on the above information (ignore interest etc.) you are required to:
(i) Calculate the amount to be paid to or recovered from Alpha Manufacturing Co. due to the
cancellation of the forward contract.
(ii) Calculate the amount to be paid to or recovered from Beta Trading Company due to extension of the
forward contract.
[CMA-Dec-2006-8M]
Ans: (i) Amount to be paid to the customer =  1,00,000; (ii) Net amount to be collected from the customers = 6,50,000
Question No. 17.4

VEDIKA TRADERS LTD. exports edible oils to Middle-East and African countries. In June the company
exported an assignment worth $ 5 million to Jambia. The payment for the same is expected to realize during the
month of September. For the company has entered into an option forward contract for delivery of $5 million over
the month of September.
The market quotes on June 30 at the time of entering into the contract were as follows:
June30. spot /$ 47.05/08
Forward 1 month 23/25 paise
2 month 47/49 paise
3 month 70/72 paise
On September’ 01, the company approached the bank for extension of the contract by another two months, that is
for delivery during the month of November.
The market quotes on September’ 01 were as follows
Spot /$ 47.58/60
2 month 37/39 paise
3 month 55/57 paise
On November’ 01, the company approached the bank to cancel the forward contract. The exchange rates as on
November’01, were as follows:
Spot /$ 47.97/99

2 month 33/35 paise
You are required to calculate:
(i) The forward rate to be quoted to Laxmi Traders on June 30
(ii) The exchange rate to be quoted by the bank on September’ 01 for the extension of the contract.
(iii) The amount of cash flows due to extension of the contract.
(iv) The exchange rate at which the forward contract to be cancelled on November’ 01.
(v) The amount of cash flows due to cancellation of the contract. (Ignore FEDAI margins for merchant
quotes.)
[CMA-June-2010-Old-10M] [CMA-TP-Dec-2013-Old-10M]
Ans: (i) 47.52; (ii) 47.95; (iii)  -4 lakh; (iv) 47.99; (v) -2 lakh.
EARLY DELIVERY/EXECUTION OF FORWARD CONTRACT

On 1 October 2015 Mr. X an exporter enters into a forward contract with a BNP Bank to sell US$ 1,00,000 on 31
December 2015 at  65.40/$. However, due to the request of the importer, Mr. X received amount on 28
November 2015. Mr. X requested the bank the take delivery of the remittance on 30 November 2015 i.e. before
due date. The inter-banking rates on 28 November 2015 was as follows:
Spot 65.22/65.27
One Month Premium 10/15
If bank agrees to take early delivery then what will be net inflow to Mr. X assuming that the prevailing prime
lending rate is 18%.
Ans: Net inflow = 6519725
[Hint: Swap Difference = 20,000 (Loss); Interest on outlay of fund = 275; Contract amount = 65,40,000]
AFTER DUE DATE EXECUTION, CANCELLATION & EXTENSION

Question No. 19A [RTP-May-2018-New] [SM-New] [May-2015-9M] [SSM-2016]
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  63.9200/9500  63.8000/8500
July  64.0500/0900  63.9300/9900
August  64.3000/3500  64.1800/2500
September  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.
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
Ans: (i) 63.6163 Rounded off to 63.6175; (ii)  1,56,740; (iii)  30,000;
(iv) 320 [Hint: on 96000 at 12% for 10 days] (v) 64.3143 rounded off to 64.3150 (vi) Total cost = 187060

MANAGEMENT
Question No. 19B [Nov-2016-8Marks]
On 10th July, an importer entered into a forward contract with bank for US $ 50,000 due on 10th September at an
exchange rate of  66.8400. The bank covered its position in the interbank market at 66.6800.
How the bank would react if the customer requests on 20th September:
(i) to cancel the contract?
(ii) to execute the contract?
(iii) to extend the contract with due date to fall on 10th November?
The exchange rates for US$ in the interbank market were as below:
10th September 20th September
Spot US$1 = 66.1500/1700 65.9600/9900
Spot/September 66.2800/3200 66.1200/1800
Spot/October 66.4100/4300 66.2500/3300
Spot/November 66.5600/6100 66.4000/4900
Exchange margin was 0.1% on buying and selling. Interest on outlay of funds was 12% p.a.
You are required to show the calculations to:
(i) cancel the Contract,
(ii) execute the Contract, and
(iii) extend the Contract as above.
Ans: (i) Cancellation cost = 55,837 [47,250+8,500+87; Cancellation rate 65.8940 rounded to 65.8950];
(ii) Charges for Execution = 55837+33,02,750 (Rate 66.0560 rounded to 66.0550)
(iii) Charges for Extension = 55837 and new rate 66.5575

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 19.1 [May-2018-Old-8M]
Y has to remit USD 1,00,000 for his son’s education on 4th April, 2018. Accordingly, he has booked a forward
contract with his bank on 4th January @  63.8775. The bank covered its position in the market @ 63.7575
The exchange rates for dollar in the interbank market on 4th April and 14th April were:
4thApril 14th April
Spot USD 1 =  63.2775/63.2975  63.1575/63.1975
Spot/ March  63.3975/63.4275  63.2775/63.3275
April  63.5275/63.5675  63.4075/63.7650
May  63.7775/63.8250  63.6575/63.7275
June  64.0700/64.1325  63.9575/64.0675
Exchange Margin 0.10% and interest on outlay of funds @ 12%. The remitter due to rescheduling of the semester,
has requested on 14th April, 2018 for extension of contract with due date on 14th June, 2018.
Rate must be rounded to 4 decimal place in multiple of 0.0025
Calculate:
(i) Cancellation rate; (ii) Amount payable on $ 1,00,000
(iii) Swap Loss; (iv) Interest on outlay of funds, if any
(v) New contract rate; (vi) Total Cost
Ans:

LEADING AND LAGGING

Question No. 20A [May-2012-Old-8M]
NP and Co. has imported goods for US $ 7, 00,000. The amount is payable after three months. The company has
also exported goods for US $ 4,50,000 and this amount is receivable in two month. For receivable amount a
forward contract is already taken at  48.90.
The market rates for  and Dollar are as under:
Spot 48.50/70
Two months 25/30 point
Three month 40/45 point
The company wants to cover the risk and it has two options as under:
(i) To cover payables in the forward market and
(ii) To lag the receivables by one month and cover the risk only for net amount. No interest for delaying
the receivables is earned.
Evaluate both the options if the cost of Rupee Fund is 12% .Which option is preferable.
Ans: Option-(i): 12179950; Option-(ii): 12333850

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 20.1 [RTP-May-2010-Old]
CQS plc is a UK company that sells goods solely within UK. CQS plc has recently tried a foreign supplier in
Netherland for the first time and need to pay €250,000 to the supplier in six months’ time. You as financial
manager are concerned that the cost of these supplies may rise in Pound Sterling terms and has decided to hedge
the currency risk of this account payable. The following information has been provided by the company’s bank:
Spot rate (€ per £): 1·998 ± 0·002
Six months forward rate (€ per £): 1·979 ± 0·004
Money market rates available to CQS plc:
Borrowing Deposit
One year Pound Sterling interest rates: 6·1% 5·4%
One year Euro interest rates: 4·0% 3·5%
Assuming CQS plc has no surplus cash at the present time you are required to evaluate whether a money market
hedge, a forward market hedge or a lead payment should be used to hedge the foreign account payable.
Ans: (a) Money market: £ 1,26,850; Forward market: £ 1,26,582; Lead payment: £1,29,071.
NETTING OFF OF FOREIGN CURRENCY

Question No. 21A [RTP-Nov-2010-Old]
Trueview Plc, a group of companies controlled from the United Kingdom includes subsidiaries in India,
Malaysia and the United States. As per the CFO’s forecast that, at the end of the june 2010 the position of
inter-company indebtedness will be as follows:
 The Indian subsidiary will be owed 1,44,38,100 by the Malaysian subsidiary and will to owe the US
Subsidiary US$ 1,06,007.
 The Malaysian subsidiary will be owed MYR 14,43,800 by the US subsidiary and will owe it US$
80,000.
Suppose you are head of central treasury department of the group and you are required to net off inter -company
balances as far as possible and to issue instructions for settlement of the net balances.
MANAGEMENT
For this purpose, the relevant exchange rates may be assumed in terms of £ 1 are US$ 1.415; MYR 10.215;
68.10.
What are the net payments to be made in respect of the above balances?
Ans: Central treasury dept. will instruct to Malaysian Subsidiary to pay
Indian Sub = £1,27,209 and the US Subsidiary to pay the Indian subsidiary £9,887
Question No. 21B [Nov-2006-old-4M]

Following are the details of cash inflows and outflows in foreign currency denominations of MNP Co. an
Indian export firm, which have no foreign subsidiaries:
Currency Inflow Outflow Spot rate Forward rate
US $ 4,00,00,000 2,00,00,000 48.01 48.82
French Franc (FRF) 2,00,00,000 80,00,000 7.45 8.12
U.K. £ 3,00,00,000 2,00,00,000 75.57 75.98

Japanese Yen 1,50,00,000 2,50,00,000 3.20 2.40
(i) Determine the net exposure of each foreign currency in terms of Rupees.
(ii) Are any of the exposure positions offsetting to some extent
[CMA Compendium] [CMA-PTP-June-2015-Old-(6+2)=8] [CMA-PTP-Dec-2014-Old-6+2=8]
Ans: (i) Net exposure: $ = 16.2 Mill; FFr = 8.04 mill; £ = 4.10mill; Yen = 8 mill.
(ii) Net Exposure in all the currencies are offset by better forward rates.
CASH MANAGEMENT BETWEEN HOLDING AND SUBSIDIARY

Question No. 22A
An American multinational corporation has subsidies whose cash positions for the month of September, 2018
are given below:
Swiss subsidiary : Cash surplus of SF 1, 50,00,000
Canadian subsidiary : Cash deficit of Can $ 2, 50,00,000
UK subsidiary : Cash deficit of 30,00,000 (UK
pound)
What are the cash requirements, if:
(i) Decentralized cash management is adopted?
(ii) Centralized cash management is adopted?
(Exchange rate: SF 1.48 / $, Can $ 1.58 / $, $ 1.5/ £)
Ans: (i) Decentralized management = $ 203,22,785;
(ii)Centralized management = $101,87,649
Question No. 22B [SSM-2016] [RTP-Nov-2009-old]

Suppose you are a treasurer of XYZ plc in the UK. XYZ have two overseas subsidiaries, one based in Amsterdam
and one in Switzerland. The Dutch subsidiary has surplus Euros in the amount of 7,25,000 which it does not need
for the next three months but which will be needed at the end of that period (91 days). The Swiss subsidiary has a
surplus of Swiss Francs in the amount of 9,98,077 that, again, it will need on day 91. The XYZ plc in UK has a net
balance of £75,000 that is not needed for the foreseeable future.
Given the rates below, what is the advantage of swapping Euros and Swiss Francs into Sterling?
Spot Rate (€) £0.6858 - 0.6869

91 day Pts 0.0037 0.0040

Spot Rate (£) CHF2.3295 - 2.3326
91 day Pts 0.0242 0.0228
Interest rates for the Deposits
91 day Interest Rate % pa
Amount of Currency
£ € CHF
0 – 100,000 1 ¼
100,001 – 500,000 2 1½ ¼
500,001 – 1,000,000 4 2 ½
Over 1,000,000 5.375 3 1
[CMA Compendium]
Ans: Total GBP on Individual Basis = £ 10,10,211, Total GBP on Swap to sterling = £ 10,13,488.61
[Hence advantage of swapping Euros and Swiss Francs into sterling = £ 3,277.61] [Assuming 365 days in a year]

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 22.1 [RTP-Nov-2015-Old] [May-2007-old-8M] [RTP-May-2011-Old]
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
Following exchange rate information are obtained:
$/ £/
Spot 0.0215 0.0149
30 days forward 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.
(i) 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.
(ii) Which method do you think is preferable from the parent company’s point of view?
[CMA-June-2008-Old-9M] [CMA Compendium]
Ans: (i) (a) cash balance =  475,323; (b)  484,080; (ii) Immediate cash pooling is preferable.

Chapter - 2: Foreign Exchange Exposure and Risk Management

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Chapter - 2

FOREIGN EXCHANGE EXPOSURE

– Forward, futures, options and swaps

© CA Nagendra Sah (www.fmguru.org)

APPLICATION OF TWO WAY QUOTE; PREMIUM/DISCOUNT

 TEST YOUR KNOWLEDGE

© CA Nagendra Sah (www.fmguru.org)

Question No. 2B [Nov.-2004-Old-4 Marks]

Question No. 2C [Nov-2003-Old-6 Marks]

Question No. 2D [May-2008-Old-8 Marks] [RTP-Nov-2012-Old]

© CA Nagendra Sah (www.fmguru.org)

Question No. 2E [Nov-2003-Old-10 Marks]

Question No. 2F [RTP-Nov-2015/May-2014-Old] [Nov-2007-Old-8 Marks]

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Question No. 2.2 [SM-Old]

Question No. 2.3 [RTP-Nov-2010-Old]

Question No. 2.4 [Nov-2009-Old-12 Marks] [May-2015-Nepal-Old-8M]

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SWAP POINT AND BROKEN PERIOD FORWARD RATE

SETTLEMENT OF TRANSACTION AT DIFFERENT DATES

 TEST YOUR KNOWLEDGE

Question No. 4.2 [SSM-2016] [May-2015-Old-8M] [Nov-2012-Old-8M] [MTP-May-2014-Old-8M]

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MONEY MARKET HEDGE AND FORWARD HEDGE

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Question No. 5D [SM-Old]

Question No. 5E [SM-Old] [As RTP-Nov-2008-old] [Must Revise]

 TEST YOUR KNOWLEDGE

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Question No. 5.2 [RTP-May-2015-Old] [RTP-Nov-2013-Old]

Spot ($/Pound) 1.4548/1.4554

[CMA-Dec-2012/June-2013-Old-5M] [CMA-PTP-June-2015-Old-5M] [CMA-PTP/MTP-Dec-2014-Old-5M]

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Question No. 6D [MTP-May-2015] [Nov-2013- 5 M]

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Ans: Loss to customer due to strike = 2,28,250

Question No. 6G [June-2009-Old-6M]

 TEST YOUR KNOWLEDGE

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Question No. 6.3

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Question No. 6.6

Question No. 6.7 [May-2018-Old-5M]

INTEREST RATE PARITY THEORY

Question No. 7B [Nov-2000-Old-8M]

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 TEST YOUR KNOWLEDGE

PURCHASING POWER PARITY OR INFLATION RATES PARITY

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 TEST YOUR KNOWLEDGE

RETURN FROM FOREIGN SECURITY

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 TEST YOUR KNOWLEDGE

© CA Nagendra Sah (www.fmguru.org)

COVER INTEREST ARBITRAGE

Question No. 11B

Question No. 11D [RTP-May-2012-Old]

 TEST YOUR KNOWLEDGE

Question No. 11.3

NOSTRO, VOSTRO AND LORO ACCOUNT

 TEST YOUR KNOWLEDGE

Question No. 12.2 [SSM-2016] [MTP-May-2015-Old] [RTP-Nov-2013-Old]

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