Spot price and quotation: (Currency and country)

1 USD = 85 INR (Base currency = USD / Direct Quote for INR – India)
1 INR = 43 CHF (Base currency = INR / Direct Quote for CHF – Swiss)
0.82 GBP = 1 USD (Base currency = USD / Direct Quote for GBP – UK)

Base currency / rate convention:

USD/GBP – 0.880/ 0.895

INR /LKR – 4.44/ 4.55
GBP/INR – 81.00/82.00

If an entity wants to sell INR and Buy LKR which rate to be used (4.44)
If an entity wants to sell GBP and Buy USD which rate to be used (0.895)
If an entity wants to buy INR and sell LKR which rate to be used (4.55)
If an entity wants to buy GBP and Sell INR which rate to be used (82)

Forward Rate / Profit or loss:

SR (01-01-2022) - 1 USD = 81 INR

FR – 6 months (30-06-2022) – 1 USD = 84
Assume the actual rate on 30-06-2022 is INR 83 and INR 86. Find the gain or loss for this contract.

If INR 83 then loss INR 1

If INR 86 then Gain INR 2

Swap Margin / points:

USD/CHF Spot: 1.4265/1.4275 Forward 3 months: 1.4277/1.4288

Find the Swap points or Swap margin.

Swap Point or Margin is 0.0012/0.0013

USD/CHF Spot: 1.4265/1.4275 1 month swap: 0.0015/0.0008

What is the forward rate?

USD/CHF – Bid / offer or Buy / Sell Margin is 0.0010

If Swap Point is added then:
USD /CHF – 1.4280/1.4283 (Buy rate < Sell rate and Buy/ sell margin is 0.0003)
If Swap Point is Subtracted then:
USD /CHF – 1.4250/1.4267 (Buy rate < Sell rate and Buy/ sell margin is 0.0017)

Since Subtraction satisfies both the criteria, correct answer is to subtract

Forward Contract – Profit or loss:

A French company exports goods to US worth USD 124,000 under Letter of Credit for 90 days. Current
exchange rates are:
Eur 5.70 = 1 USD
If USD is to get strengthened by 5% what would be the transaction gain or loss in Euro?
If it weakens by 5% what is the impact?

French Company to receive USD 124,000

If received today (124000X 5.70) = EUR 706,800

After 90 days USD appreciates by 5% then

124,000 X 5.985 = EUR 742,140 (Profit)
After 90 days USD Depreciates by 5% then
124,000 X 5.415 = EUR 671,460 (Loss)

A Indian company imports goods from US worth USD 100,000 180 days credit. Current exchange rates
are:
INR 50 = 1 USD
If INR is to get strengthened by 5% what would be the transaction gain or loss in Euro?
If it weakens by 5% what is the impact?

Homework – kindly workout

Hint – INR appreciates profit and depreciates is loss

Two-point Arbitrage:
Two-point arbitrage concerns two currencies in two geographically separated markets.

Example 1:
SR ￡1 = $1.55 in London and
SR ￡1 = $1.60 in New York
If you have $ 1,000,000, is there any arbitrage profit possible?

Sell the USD in London @ 1.55 = GBP 645,161

Buy USD in NY @ 1.60 = USD 10,32,258
Original USD 10,00,000 – Post Arbitration USD 10,32,258
Profit = 32,258

Example 2:
SR ￡1 = $1.5495 – 1.5505 in London and
SR ￡1 = $1.5995 – 1.6005 in NY and

a. Convert indirect quote to direct quote.

b. If you have ￡ 1,000,000, is there any arbitrage profit possible?
a. USD/GBP = 0.64495/0.64537
b. GBP =1,000,000
Sell GBP in London Market @1.5495 = USD 1,549,500
Buy GBP in NY market @ 1.6005 = USD 968,135 (Loss)
Alternatively
Sell GBP in NY Market @1.5995 = USD 1,599,500
Buy GBP in London market @ 1.5505 = USD 1,031,602 (gain)

Example 3:
Spot Rate (Switzerland) 1$ = CHF 1.3689 – 1.3695
Spot Rate (USA) 1CHF = $ 0.7090 – 0.7236
You have 1 million CHF. What amount of profit you can make from arbitrage?

CHF 1,000,000 in Hand

Alternate 1
Sell CHF @ Swiss market @ 1.3695 = USD 730,194
Buy USD @ US market @ 0.7236 = CHF 1,009,113

Alternate 2
Sell CHF @ USA market @ 0.7090 = USD 709,000
Buy USD @ Swiss market @ 1.3689 = CHF 970,550

Cross rate Arbitrage or three-way arbitrage:

In three point arbitrage, we will first sell available currency in one market, convert to different
currency and finally reconvert to the same currency in different markets

Example 1:
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 USD1,000,000. Assuming that there are no transaction costs, explain
whether there is any arbitrage gain possible from the quoted spot exchange rates.

Step 1 Buy INR @ Mumbai = INR 48,300,000

Step 2 Convert INR to GBP in London = GBP 6,230,650
Step 3 Convert GBP to USD in Ny = USD 10,112,968

Example 2:
In NY USD 1 = CHF 1.6639 – 1.6646 – (i) [CHF/USD]
In London USD 1 = Euro 0.9682 – 0.9686 – (ii) [Euro/USD]
In Australia Euro 1 = CHF 1.6410 – 1.6423 – (iii) [CHF/Euro]

Assume we have with $ 1 million, how we can make profit.

USD in Hand 1,000,000
Alternate 1 – NY – AUS – LON
NY Market @ 1.6639 = CHF 1,663,900
AUD Market @ 1.6423 = EUR 1,013,152
LON Market @ 0.9686 = USD 1,045,996

Alternate 2 – LON – AUS – NY

LON Market @ 0.9682 = EUR 968,200
AUD Market @ 1.6410 = CHF 1,588,816
NY Market @ 1.6646 = USD 954,473

Alternate 1 Profit

Example 3:
A British citizen holding GBP 5 Million looking for triangular arbitration in the following markets and
quote:
INR/USD: 0.0132/0.0134 Mumbai
INR/GBP: 0.0120/0.0125 London
USD/GBP: 0.9031/0.9034 New York

Show both the paths.

Homework - Hint both will be loss No arbitrage possible

Example 4:
India Silk Limited, an established exporter of silk materials, has a surplus of US$ 20 million as on 31st
May 2015. The banker of the company informs the following exchange rates that are quoted at three
different forex markets:
GBP/ INR 99.10 at London
USD/ INR 64.10 at Mumbai
USD/ GBP 0.65 at New York
Assuming that there are no transaction costs, advice the company how to avail the arbitrage gain from
the above quoted spot exchange rates.
Hint – Mumbai – London – New York

Answer Hint: (Use only single rate)

Buy INR Sell USD
Buy GBP Sell INR
Buy USD Sell GBP

Forward Contracts – Premium or Discount:

Example 1:
Spot rate of EUR to USD is 0.716. Six month forward rate of EUR is 0.742. What is the forward premium
or discount on EUR on annual basis.
(Forward – Spot ) / Spot X 12/6 X 100
= 7.26%

Example 2:
Spot rate of AUD to USD is 0.786. Three month forward rate of AUD is 0.772. What is the forward
premium or discount on AUD on 6 months and on annual basis.

6 months = discount 3.56%

PA = discount 7.12%

Example 3:
RIL has purchased machinery worth US$ 500,000 from the US which is payable in 3 months time. RIL
expects that the frame will weaken over a period. He has asked his banker for forward exchange cover.
The rates existing at the time are:

What is the INR equivalent payable after 3 months?

Buy rate = 61.65 INR

Sell rate = 62.30 INR

Payable by RIL USD 500,000 X 62.30 = INR 31,150,000