Q2. (a) What is a foreign exchange swap?

(b) How are forward rates determined in:

i) International forex markets
ii) Indian forex markets.
(c) Assume 3 month USD LIBOR is 0.3 % p.a., 3 month INR MIBOR is
8% p.a. and the USD is quoting at a premium of 6% p.a. in the
forward market against the INR. Does CIP hold true? If not then is
it possible to arbitrage between rupee money market and dollar
money market? If so then would it be “Buy-Sell” or “Sell-Buy”
swap?
(d) Bank “A” quotes Euro-USD rate: 1.0330/35 and Bank “B” quotes Euro-USD
Rate 1.0315/20. Is it possible for a third bank “C” to exploit risk-free arbitrage
opportunity? If so then explain how?
(e) Bank “A” buys USD 10 mio from Bank “B” on 28th September 2014 for
delivery 1 month forward at the INR 61.50/USD . What is the date of settlement
of the transaction? When is the transaction settled if the settlement date falls on a
holiday? Show how debits and credits take place on the settlement day.
(f) Explain what is meant by Yen carry Trade? What are risks faced in undertaking
Yen Carry Trade?
(g) An Indian importer wants to import equipment from his overseas office in
Singapore. Can the Singapore office of the company book a Non-Deliverable
Forward (NDF) to hedge INR-USD exchange rate risk ? If “Yes” then explain
the mechanism.

Q3. Answer (a ) to (c) with reference to the following Table from Reuter Screen:

CCY SPOT 1 MTH 2MTH 3 MTH 6 MTH

EUR 1.1356/57 3.7/3.8 8.5/8.6 13.4/13.7 30.7/31.2
GBP 1.5856/60 1.5/1.3 2.8/2.6 3.9/3.5 7.2/5.7
JPY 115.36/40 1.8/1.7 4.2/4.0 6.9/6.8 17.6/17.2
CHF 0.9717/21 5.48/5.32 12.40/12.00 19.80/19.10 45.86/44.14
INR 61.6700/00 66.50/66.60 78.00/80.00 109.30/111.50 171.00/173.00

. (a) Which of the above quotes are (i) Direct and (ii) Indirect ?
(b) Which are the currencies that are quoting at (i) Premium to USD and which
currencies are quoting at (ii) Discount to USD?
(c) Compute outright forward quotations for the following currencies: (i) 1 mth
forward Euro (ii) 2 mth forward Pound Sterling (iii) 3 mth forward Yen (iv) 4
mth forward Swiss Francs and (v) 6 mth forward Indian Rupee.
(c) Explain with the help of a numerical example how an Indian importer can
make profit by cancelling his forward contract when the rupee depreciates and
the forward discount on the rupee rises sharply.
(d) A Japanese company wants to acquire a 15% equity stake in an Indian company
and hedge exchange rate risk. Explain the mechanism through which it can do so.
 (e) What is meant by convertibility of a currency on the capital account? Explain
what are the pre-conditions of making the rupee convertible on the capital
account?
(f) What are the perils RBI perceives by making the Indian rupee fully convertible
on the capital account? .
(g) What is the difference between nominal and real exchange rate? What is the
significance of real effective exchange rate (REER)?
(h) The USD/INR exchange rate a year ago was 61. The inflation differential during
the past one year between India and the U.S. has been 5% p.a. What should be
the fair value of the INR according to PPP Theory? At the current exchange of
60.50 is the INR overvalued or undervalued against the USD? By how much in
percentage terms?

Q4. (a) What is meant by Balance of Payments? What are its components?
(b) What is meant by convertibility of the rupee on (i) current account
(ii) capital account? Explain.
(c) What are the risks of making the rupee convertible on the capital
account?
(d) Explain with the help of a diagram the “Impossible Trinity Trilemma”. In the
context of the steep depreciation of the Indian rupee against the dollar from INR
55/USD in May’13 to INR 69/USD in Aug’13 explain the impossible trinity
trilemma that RBI faced.
(b) What is the difference between nominal and real exchange rate? What is the
significance of real exchange rate? Explain.
(c) What is Purchasing Power Parity (PPP) also known as the “Law of One Price”
(LOOP) state? What is Absolute PPP? How does it differ from relative PPP?
Explain.
(d) Explain carefully what is meant by the statement “the Indian Rupee is
overvalued against the U.S. Dollar?

Q5. (a) What is “Euro currency?”

(b) What are the major characteristics of the Eurocurrency Market?
(c) Why do depositors and borrowers find the Eurocurrency Market attractive?
(d) What are the major segments of the Eurocurrency Market?
(e) What is a syndicated Euro Loan? How are syndicated Euro Loans loans priced?
(f) What are the advantages for an Indian company to borrow foreign currency debt
through a syndicated Euroloan?
(g) What type of a structure do Indian companies adopt while acquiring
a company overseas? Explain.

Q6. (a) What are the factors that an Indian company considers before deciding whether
to borrow foreign currency debt or rupee debt?
(b) What are the advantages for an Indian company to borrow foreign currency debt
through a syndicated loans compared to a bond issuance?
(c) How are syndicated loans priced?
 (d) What kind of a structure do Indian companies adopt while acquiring a company
overseas? Explain.
(e) What are the three major differences between Eurobonds and Foreign Bonds?
(f) What are the main distinguishing features between Reg S bonds and 144-A
Bonds?
(g) What are the main characteristics of Yankee Bond Market? How do they differ
from a Euro Bond Market?
(e) What is a Depository Receipt? Explain with the help of a diagram the
mechanism for issuing a DR. What are the advantages of raising equity through a
DR for both the borrower and the investor?

Q7. (a) What are the factors that an Indian company needs to consider before deciding
whether to borrow foreign currency debt v/s rupee debt? (1)
(b) Which is the preferred debt instrument for Indian companies to raise foreign
currency debt? Explain. (1)
(c) Why does RBI stipulate in the ECB guideline that (i) the minimum average
maturity for ECBs greater than USD 20 mn should be 5 years and (ii) end-use
should not be in stock market and real estate? (1)
(d) What are the main steps involved in borrowing a syndicated foreign currency
loan? (2)
(a) How is a syndicated loans priced ? In other words how is the all-in pricing i.e.
spread over Libor + fee on an annualized basis determined before submitting a
term-sheet to a company? (1)
(f) What type of a financing structure do Indian companies adopt while acquiring a
Company overseas? Explain with reasons. (2)
(g) What is meant by (a) clear market clause and (b) market flex clause which are
normally included in the terms-sheets of a syndicated foreign currency loans?
(2)

Q8. (a) Explain how a forward contract is a simple financial derivative

(b) With the help of graphs explain the basic building blocks for hedging financial
risk?
(c) What are the two major classifications of derivative contracts? What are the
basic instruments under each of these classifications?
(d) Explain with the help of a diagram how a Call Option is a derivatives instrument?
(e) What is a FRA? How does it differ from an IRS?
(f) Under what circumstances would a company decide whether to buy a FRA or
IRS for hedging its interest rate risk?
(g) What is a swap? With the help of diagrams explain the three major types of swaps
and they can be used for hedging rate risks..

Q9. (a) Explain with the help of a diagram how a forward contract is (i) a simple
financial derivative instrument and (ii) a symmetrical hedge. Also explain with
the help of a diagram how a firm can hedge its price risk by buying a forward
contract.
 (b) With the help of diagrams explain the basic building blocks for hedging financial
risk. What is “LEGO Approach to Financial Engineering”.
(c) Draw the pay-off profile of an options contract and explain why it is (i) an
asymmetrical hedge and (ii) a derivative instrument.
(d) What is a FRA? How does it differ from an IRS?
(e) Under what circumstances would a company decide whether to buy (i) FRA and
(ii) IRS for hedging its interest rate risk?
(f) What is Cap? Floor? Collar? Draw their pay-off profiles.
(g) Assume that you are the treasurer of a company having a floating rate loan
Under what different types of interest rate scenarios would make a decision to buy
FRA, CAP, IRS or COLLAR. Explain carefully.

Q10. (a) What is “Covered Interest Parity or Arbitrage”? Does it hold true in Indian the
forex market? Explain.
(b) Assume 3 month USD LIBOR is 0.3 % p.a., 3 month INR MIBOR is 8% p.a. and
the USD is quoting at a premium of 6% p.a. in the forward market against the
INR. Does CIP hold true? If not then is it possible to arbitrage between rupee
money market and dollar money market? If so then would it be “Buy-Sell” or
“Sell-Buy” swap?
(c) Takeshi Miyake is a currency trader in Mizuho Bank, Tokyo. The Spot
USD/JPY exchange rate on 12th November 2014 was 120 and the current
indications are that short-term interest rates in the U.S. i.e. 90 day rates are about
to rise from the current level of 0.50% p.a. The Fed is concerned about expected
inflation and has been publicly considering raising rates by 25 basis points. The
90 day forward rate quoted to Miyake are all about the same i.e. USD/JPY
119.50. The current 90 days JPY Euro deposit rate of interest is 0.125% p.a.
Takeshi has JPY 250 mio at his disposal.
(i) Can Takeshi make profit? If so how much profit in JPY can he hope to
make?
(ii) If future spot exchange rates were determined by interest differentials
alone (i.e. forward ate was a very good forecast of future spot exchange
rate) what would Takeshi expect the spot rate in 90 days if the U.S. does
the expected.
(iii) If Takeshi’s expectations of future spot rate is that of (ii), what profit
could he be expected to make from uncovered interest parity?
(d) Explain with the help of a simple numerical example what is meant by Yen carry
Trade? What are risks faced in undertaking Yen Carry Trade?
(e) Bank “A” quotes Euro-USD rate: 1.0330/35 and Bank “B” quotes Euro-USD
Rate 1.0315/20. Is it possible for a third bank “C” to exploit risk-free arbitrage
opportunity? If so then explain how?

Q11. (a) Does Covered Interest Parity (CIP) hold true in Indian forex market? Explain
why or why not?
(b) Suppose 3-mth USD LIBOR is 5% p.a., 3 mth INR MIBOR is 12% p.a. and the
USD is quoting at a premium of 4% in the forward market against INR. Is it
 possible to arbitrage through CIP? If so then would it be a “Buy-Sell”
or “Sell-Buy” Swap? How much return, if any, in percentage will you earn?
(c) How are forward rates determined in the Indian forex markets?
(d) Assume that a bank is long spot for USD 1 mio against INR and short for 3
months forward for USD 1 mio. Explain different ways in which the bank can
correct the mismatch position.
(e) What does it mean when we say that the Indian rupee is “overvalued” or
“undervalued” against USD? Assuming that inflation rate in India is 8% p.a. and
that in the U.S. is 2% p.a. is the rupee overvalued or undervalued against the
USD? Assuming that this inflation differential is expected to continue over the
next one year will the rupee appreciate or depreciate against the USD and by how
much?
(f) Bank “A” buys USD 10 mio from Bank “B” on 28th Sep 2012 for delivery 1
month forward at the rate INR 54.50 / USD. (i) What is the date of settlement of
the transaction? (ii) When is the transaction settled if the settlement day falls on a
holiday? Show how debits and credits take place on the settlement day.
(g) Bank “A” quotes Euro-USD rate : 1.0660 /65 and Bank “B” quotes Euro-USD
rate : 1.0645 /55. Is is possible for a third bank “C” to exploit risk-free arbitrage
opportunity? If so then explain how?
(h) What are the factors that determine INR-USD exchange rate?
(i) An Indian importer wants to import equipment from his overseas office in
Singapore. Can the Singapore office of the company book a Non-Deliverable
Forward (NDF) to hedge INR-USD exchange rate risk ? If “Yes” then explain
the mechanism.
(j) Explain with the help of a numerical example how an Indian importer can make
profit by canceling his forward contract when the rupee depreciates and the
forward discount on the rupee rises sharply.
(k) What is meant by convertibility on the Capital Account. What are anticipated
risks of making the Indian Rupee fully convertible on the Capital Account?

Q12. (a) What is a Swap? Explain with the help of diagrams the different types of swap
transactions.
(b) Explain the rationale for doing (i) currency swap; (ii) interest rate swap.
(c) What are different types of risks faced by a bank which acts as an intermediary
between two swap counter parties.
(d) Company “A” enters into a 5 year IRS with bank “B” whereby it pays quarterly
fixed rate against 3 month USD LIBOR. The notional principal amount is USD
100 mio. The 5 year IRS quote offered by bank “B” is 6.00/5.75. Draw a
schematic diagram to explain how the company hedges its interest rate risk.
(e) As Indian company wants to hedge its interest rate risk on a loan of USD 100
mio which it has borrowed at LIBOR+15 bppa for maturity of 3 years. The
company enters into a cross-currency interest rate swap with a bank which
quotes a swap rate of 10.75/10.70 for USD/INR swap. What is the fixed rate of
interest the company pays by entering into the swap.
 (f) What are different structures available for hedging interest rate risk and INR-
USD exchange rate risks on external commercial borrowings (ECBs) in India?

Q13. (a) What is Eurocurrency? Eurocurrency market?

(b) What is syndicated loan? What are the steps involved in syndicating a foreign
currency loan?
(c) How do banks price a loan underwritten by them?
(d) Explain the methodology used by Indian companies for determining whether
foreign currency borrowing of say 5 years bullet maturity is cheaper or more
expensive than equivalent amount of rupee borrowing?
(e) What are the advantages for an Indian company to borrow foreign currency debt
through a syndicated loan compared to a bond issuance or vice-versa?
(f) What are the three major differences in characteristics between Eurobonds and
Foreign Bonds?
(g) What are the main distinguishing features between Reg S bonds and 144-A
bonds?
(h) How are USD fixed rate bonds priced? How are FRNs priced?
(i) What is a Yankee Bond? What are the major characteristics of Yankee Bond
Market?
(j) Briefly state the major advantages and disadvantages of the following bond
markets from the issuers perspective:
(i) Euro Bond (ii) Yankee Bond (iii) Samurai Bond.

Q14. (a) What is a Yankee Bond? Samurai Bond? Bull Dog Bond?
(b) Briefly state the major advantages and disadvantages of the following bond
markets from the issuers perspective:
(j) Euro Bond (ii) Yankee Bond (iii) Samurai Bond
(c) Explain the major differences between: (i) Public Issuance, (ii) 144-A placement
and (iii) USPP in the Yankee bond market.
(d) Of the above markets which is the most preferred from an Indian company’s
point of view? Explain.

Q15. (a) Explain with the help of diagrams the LEGOs of Financial Engineering.
Show how : (i) options can be replicated by snapping together a forward, futures
or swap contract with a position in risk-free security and (ii) calls and puts can be
snapped together to become forwards.
(b) Draw the pay-off profile of a Put Options contract and explain why it is a
derivative and also asymmetrical hedge? With the help of a diagram explain how
an exporter can hedge exchange rate risk by buying a Put Option.
(c) A “bull spread” is purchase of call option with relatively low exercise price and
sale of a call option with relatively high exercise price. Draw the pay-off of a
bull spread. Under what expectations of the underlying would a trader use this
strategy?
(d) A “bear spread” is a sale of a call option with low exercise price and the purchase
of a call option with high exercise price ? Draw the pay-off profile of a bear
 Under what expectations of the underlying would a trader use this strategy?
(e) A “calendar spread” is a position that is created by taking a long position in a call
Option that matures at one time and a short position in a similar call option that
matures at a different time. Draw the pay-off profile of a calendar spread. Under
what expectation would a trader buy Calendar Spread? (10)

Q16. (a) Explain with the help of a diagram the “Impossible Trinity Trilemma”.
(b) In the context of the recent steep depreciation of the Indian Rupee against the
US Dollar, explain the “Impossible Trinity Trilemma” that RBI faced.
(c) What policy measures should RBI have taken, if any, in advance to stem the
steep depreciation of the Indian rupee against the US Dollar post announcement
of QE in May this year by the Chairman of the US Fed Ben Bernanke?
(d) Assuming inflation differential between India and the U.S. during past two
years of about 7% and Rupee-US Dollar exchange rate of INR 55/US in May
this year what should have been the fair value of the rupee according to PPP
theory? At the current exchange rate of INR 61/USD is the rupee
undervalued or overvalued against the USD compared to the fair value ? By how
much percentage?
(e) In the current macroeconomic scenario do you think the Indian Rupee explain
whether the rupee should be made convertible on the capital account? Explain
what are the preconditions for CAC? (10)

Q17. (a) Assume 3-mth USD LIBOR is 5% p.a., 3 mth INR MIBOR is 12% p.a. and the
USD is quoting at a premium of 4% in the forward market against INR . Does
CIP hold true? If not then is it possible to arbitrage through CIP? If so then
would it be a “Buy-Sell” or “Sell-Buy” Swap? How much return, if any, in
percentage will an arbitrager earn?
(b) Suppose you are a dealer in the dealing room of a bank. What factors would you
consider when setting the INR-USD forward rate first thing in the morning when
the dealing room opens for trading?
(c) Suppose that as a dealer you are long spot for USD 1 mio against INR and short
for 3 months forward for USD 1 mio. Explain different ways in you would
correct the mismatch position.
(d) In New York: 1 GBP = 2 USD and 1 USD = 2 Euro. In Frankfurt: 1 GBP = 5
Euro. Is it possible for a trader to exploit risk-free arbitrage between these two
markets. If so then show how much profit a trader can make?
(e) Bank “A” quotes Euro-USD rate : 1.0660 /65 and Bank “B” quotes Euro-USD
rate : 1.0645 /55. Is it possible for a third bank “C” to exploit risk-free arbitrage
opportunity? If so then explain how?
(f) An Indian importer wants to import equipment from his overseas office in
Singapore. Can the Singapore office of the company book a Non-Deliverable
Forward (NDF) to hedge INR-USD exchange rate risk ? If “Yes” then explain the
mechanism.
(g) Explain with the help of a simple numerical example how an Indian importer can
make profit by canceling his forward contract when the rupee depreciates and the
forward discount on the rupee rises sharply.
 (h) Explain with the help of a simple numerical example how an exporter can make
profit by booking and cancelling a forward contract.
(i) Bank “A” buys USD 10 mio from Bank “B” on 28th Sep 2012 for delivery 1
month forward at the rate INR 624.50 / USD. (i) What is the date of settlement of
the transaction? (ii) When is the transaction settled if the settlement day falls on a
holiday? Show how debits and credits take place on the settlement day.
(j) Explain what is meant by Yen Carry Trade? What are the risks faced in
undertaking a Yen Carry Trade? (10)

Q18. (I) Please answer questions : (a) to (d) based on the table below from Reuter
Screen:

CCY BANK SPOT BANK PREV1 HIGH LOW

EUR BBHB 1.2357/60 DBSK 58/597 1.2381 1.2339

JPY SGAX 79.38/42 BCFX 37/43 79.49 79.24
GBP SBFR 1.5704/05 WBCY 02/06 1.5738 1.5687
CHF JPMY 0.9719/22 BCPX 16/21 0.9733 0.9698
AUD CITIX 1.0441/42 SCBX 40/43 1.0528 1.0425
NZD BOAX 0.8073/75 BNPPX XAU UBSZ 1614.30/615.05
HKD HSHK 7.7561/73 DBSSG XAG MHBK 28.14/28.22
SGD BCFX 1.2523/26 BHFX CAD SGX 0.9874/75
MYR OCBM 3.1300/30 BOAM IDR MTJK 9485/9495
THB SCBK 31.520/540 BNSX INR CNFX 55.730/740
(b) Toyota Motors sells Toyota cars to a U.S. importer and invoices in USD. At
what rate will Toyota Motor’s bank convert USD in to Japanese Yen? (1)
(c) A Swiss car dealer imports BMWs from German car dealer. What rate does the
bank quote the car dealer so that he can buy Euro with Swiss Francs ? (1)
(d) Calculate the Rupee Yen bid and offer rates. (2)
(e) An Indian tourist wants to visit Bangkok. He wants to buy Thai Bhat 50,000.
How many rupees will he have to pay to buy Bhat 50,000? (1)

Q 19. (a) Why would an Indian company want to borrow funds by issuing a foreign
currency bond as compared to a syndicated foreign currency loan?
(b) State three major differences between a Eurobond and Foreign
Bond.
(c) What is (i) Straight Euro Bond? (ii) FRN? and (iii) Euro-Convertible Bond?
(d) How is a Straight Euro Dollar Bond price? How is a Dollar FRN priced?
(e) What are the special features Yankee Bond market compared to Eurobond
market?
(f) What is Rule 144-A? Reg-S?
(g) What are the factors that an Indian company would want to look into before
issuing a US Dollar denominated bond under (i) 144-A Format (ii) Reg-S
Format and (iii) Both?
 (g) What is a Samurai Bond? What are the problems faced by Indian companies in
accessing Samurai Bond market? What type of Indian companies have issued
Samurai Bonds and why?
(h) What are Dim Sum Bonds?
(i) When would an Indian company want to borrow through ECA Financing? What
are the advantages and disadvantages of ECA financing? (10)

Q20. (a) State briefly what lessons do we learn about prudent management of
domestic economic policies from the three major economic crisis that the world
has witnessed during the past three decades viz. Asian Crisis of the 1997-98,
Sub-Prime Crisis of 2007-08, and the Euro-zone Crisis of 2010 ?
(b) What solutions, if any, would you suggest to solve the Euro-zone crisis?
(c) Why was India not largely affected by these crises?
(d) Recently the U.S. rating agency S&P has upgraded India’s sovereign rating from
BBB- (negative watch) to BBB- (stable). What macroeconomic factors do you
think have led to such an upgrade?

Q21. (a) What is a Derivative? What are the basic building blocks i.e. derivative
contracts?
(b) With the help of a diagrams show how: (i) options can be replicated by snapping
together a forward, futures or swap contract with a position in risk-free security
and (ii) calls and puts can be snapped together to become forwards.
(c) Draw the pay-off profile of a forward contract and explain why it is a derivative
and also a symmetrical hedge? With the help of a diagram explain how a firm
can hedge price risk by buying a forward contract.
(d) Draw the pay-off profile of an options contract and explain why an options is an
asymmetrical hedge. With the help of diagram show a company can hedge its
price risk by buying a Call Options contract.
(e) What are the major differences between a forward and futures contract?
(f) What is FRA? Explain how a FRA can be used to hedge rate risk. Draw a
schematic diagram to show the cash-flows.
(g) Company “A” enters into a 5 year IRS with bank “B” whereby it pays quarterly
rate of interest against 3 mths USD Libor. The notional principal amount is USD
10 mio . The 5 year IRS quote offered by the bank is 6.00/5.75. Draw a
schematic diagram to explain the IRS.

Q22. (a) Explain with the help of diagrams the basic building block of derivatives
contracts. Show how : (i) options can be replicated by snapping
together a forward, futures or swap contract with a position in risk-free security
and (ii) calls and puts can be snapped together to become forwards.
(b) Draw the pay-off profile of a Put Options contract and explain why it is a
derivative and also asymmetrical hedge? With the help of a diagram explain how
an exporter can hedge exchange rate risk by buying a Put Option.
(c) A “bull spread” is purchase of call option with relatively low exercise price and
 sale of a call option with relatively high exercise price. Draw the pay-off of a
bull spread. Under what expectations of the underlying would a trader use this
strategy?
(d) A “bear spread” is a sale of a call option with low exercise price and the purchase
of a call option with high exercise price ? Draw the pay-off profile of a bear
Under what expectations of the underlying would a trader use this strategy?
(e) An Indian company has rupee liability with maturity of five years at 9%
p.a. A foreign bank advises the company to swap its rupee liability to
USD liability whereby the bank pays the company fixed rate at 9% p.a.
and receives fixed rate at Libor + 2.25% p.a. on notional principal amount
of USD 10 mio at the spot rate of 54 per USD. The future exchange of
cash-flows are net settled at the spot rate two business days prior to the
date of payment. The principal is exchanged at the end of the period of
maturity.
(i) What risk does the company face by entering in the swap? Quantify the
risks.
(ii) Do you think that the company should enter into the swap given the
underlying risks?
(iii) What is the effective cost of borrowing for the company given the risks?
(e) Assume that you are the treasurer of a company having a floating rate loan
indexed to LIBOR. What are the different types of interest scenarios would you
consider before making a decision to choose between (i) FRA, (ii) IRS, (iii) CAP,
(iv) COLLAR? Explain with the help of a diagram how a company can hedge
interest rate risk by using each of these derivative instruments.

Q1. (a) State briefly what lessons do we learn about prudent management
of domestic economic policies from the three major economic
crisis the world has witnessed during the past three decades viz.
Asian Crisis of the 1997-98, Sub-Prime Crisis of 2007-08, and the
Euro-zone Crisis of 2010 ?
(b) What solutions, if any, would you suggest for the Euro-zone crisis?
(c) What are the economic consequences on (a) rest of Eurozone countries and (b)
world economy of Greece exiting the Eurozone?
(d) What is meant by Optimum Currency Area? Is Eurozone an Optimum Currency
Area? Explain.