Q.1.

The followving spot rates are

FOREX
Currency observed In tlhe foreljn
Britain pound Foreln Currency per currency marlkct.
00.62 U.S.8
Netherlands Gullder
Siweden Kroner 01.90
Switzerland Frane 06.10
Italy Lira 01.50
Japan Yen 1,300.00
On the basis of 140.00
this informatlon
British pounds that cancompute to the nearest second declnal the
be acqulred for $ 100 number of
$ that 50 Duteh
Swedish Rronerguilders
C will buy
that can be
d. Dollars tlhat 200 Stvlss acqulrod for 5 40
froncs can buy
talan Lira that can be
acqulred for $ 10
Dollars that 1000 Japaneso
Q.2 yen will buy
Suppose Uhe
exchange rate
between US dollars and the French
rate betvween dhe dollar and the British franc was PFF 5.9 = $ 1 and the exchange
between francs and pounds? pound was 1 pound $1.50, What was the exchange rate
Q.3. US $ is quoted as under
Inter Bank Market as on
25.01.2006
Spot US$ 1= Exchange Rate
Spot February 42.4000/4200
Spot March
2000/2100
3500/3600
Calculate the forward buying and selling rate.
9,4 USS is quoted as under
Inter Bank Market as on 25.01.2006
Exchange Rate
Spot US S1= 42.4000/4200
Spot February 3800/3600
Spot March 5700/540o
Calculate the forward buying and selling rate.
9.5 Suppose that1 French Franc could be purchased in the
the franc foreign exchange market for 20 US cents today if
appreciated 10 percent tomorrow against the dollar how many francs would
a dollar by
tomorrow?
bw
Fleur du lac, a French co. has
shipped goods to an American importer under a we at
letter of credit
arrangement which calls for payment at the end of 90 days. The invoice is for $ 124,000. Presently the
exchange rate is 5.70 French francs to the $. If the French franc were to weaken by 6% what would
happen? (Note; make calculation in francs per $) Ly ham hal e r povter
Q.7 A company operating in a country has dollar as its unit
of currency has today invoiced sales
Co. the payment being due in 3 month_ from the date of invoice. The
to an
Indian_we
invoice amount is $ 7500 and
today spot rate is S0.025=Re.1. It is anticipated that exchange rate will decline by 10% over the 3
months period and in order to protect the dollar exchange rate is quoted as
$0.0244=Rs.1.
You are required to calculate the expected loss and show to what extent it can be hedged by the forward
Ameica Sel
contract indua Pa3 menths Amuut4
9.8. Kt Ltd. is planning to import multi-purpose machine from Japan at a cost of 7200lakhsyen. The co. can
avail loans @15%interestp.a. on quarterlyrestswith which it can import themachine.However there
is an offerfrom Tokyobranchof an Indian-based bank extending credit of 180 days at 26p.a. against
opening of an irrevocable letter of credit hey qua
Other information
Pe int. melisn SU
Present exchangerate Rs. 100 360 yen Ompovrd int ka 1pmula tusea
180 days forward rate Rs. 100 365 yen h
Commission charges for&0C at 2% per 12 months.
CA Ketan Thokkar (AIR) Mons arr \ai
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 LIBOR - lonel On inter bank offer ta
CMA Final
Mumboi interbank Aheh a Forex

Advice whether the offer from the

foreign branch should be
In Sept 2005 KT Ltd. assesses thc March 2006,spot rate per accepted
or not ?
99 pound sterling at the followIng oue
Exchange Rate
$1.30/Pound Probability
$ 1.35/Pound 0.15
$1.40/Pound 0.20
$1.45/Pound 0.25
$1.50/Pound 0.20
What is the expected 0.20
spot rate for iMarch 20067
It the months forward rate is $1.40
March 20067 should the Orm sell forward its Pound receva "
Q.10 KT Ltd an Indlan kisell kor c d nhi
Company has an export exposura of 10 mlllon
end. Yen Is not dlrecluly quoted against rupce. The curront (100
Jakhs) yen payable by Septetme
INR/USD= Rs.41.79 spot rates are,
JPY/USD= 129.75
it is estimated that Yen
will depreclato/to 144 level and rupee to
Forward rates for Sept. 2005 are depreciate agalnst dollar to S3
INR/USD= Rs.42.89 y nuhta toko
PY/USD= 137.35
You are required to :
1 Calculate the expected loss if the firm
2. How the position will do nothedge
3. If the spot rate on change if the firm takes
forward cover
30th September 2005
JPY/USD=137.85 isthe decislon to take forward cover cventually
was

is
INR/USD= Rs.42.78 and
Q.11. Kt Ltd. has taken a 6 justifed.
month loan form their foreign collaborators for US Dollars 2
payable on maturity is atLIBORplus 1.0% Current millions. Interest
Enquiries regarding exchange rates with their bank6elicit
months LIBOR is 2%.
the following information:
Spot USD 1 Rs. 48.4575
6 month foorward Rs. 48.4575
What would be their total commitment in
rupees., if they enter into forward contract?
Q.12. PC exports holding an export bill in United States Dollar (USD)
are
SP
are worried about the falling USD value which is
currently at
1,00,000 due 60 days hence. They
consignment has been priced on an exchange rate of Rs.45.60 per USD. The concernedexport
a 60 day forward rate of Rs.4520 Rs.45.50per USD. The firm's bankers have quoted
The rate of discount quotedCalculate. with theirbank elicit the following
The probable loss of
by the bank Makab
operating profit if the forward sale is agreed to.
Q.13. PC Fill invested an amount of $ 200 million in the BSE
Sensex, when the Sensex
was 3800 and the
rate was Rs.38.50/$. However the Sensex shed 300 points in spot
to Rs./S 42.50. What is the gain or loss to Fil if it one month time while
decides to liquidate the investments/
rupee depreciated
aPqisa,
American im
Q.14. An American ínvestor purchased stocks worth Rs49 lakhs on the Bormbay Stock
exchange rate was Rs. 49/$. One year later he finds that his portfolio has moved Exchange when the
in line with the
Bombay Sensex and appreciated by 25%. The
spot rate prevailing at the end of one year was
the investor decides to
withdraw from India. What would be his dollar returns/ Rs.46/S. If
Q.15. KT Ltd. operating in Japanmilega humlg9 ko Dkarna has
has today esfected sales to an
months form the date of invoice. The invoice amount is(ndian company, thé paymént being due 3
equivalent to Rs.30 lakhs. It is anticipated that the exchange 108 lakhs yen. At today's spot rate it is
rate will decline by 10% over the 3
period and in order to protect the yen payments the importer proposes to take month
the foreign exchange market. The 3 appropriate action in
are required to calculate the
months forward rate is presently quoted as
3.3 yen per Rupee. You
expected loss and to show how it can be hedged by a forvard contract.
A Thai c o e
0.16. The
A Thai company is expecting to receive US$ million from its
5 customer in the US after three
current spot exchange rate is Baht 43.758 and 90 day forward rate is Baht 45.354. What willmonths, be the
consequence if the Thai firm
a. Does not caver its exposure

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 CMA Final Forex

b. Covers 60% ond kecps 40'% uncoverad,

C. Covers 100% exposure by enterlng lnto n forward contract.
Suppose tlhe spot exchange rnlent the tlmo Thal
amount recefvable In Balht. company recolves pay1nent Is Baht 44.10/5 what Is

Q.17 month Interest rate (anuallzel) I»

The six
laly and Prance Is
change rate Is Lira 296. 10/PT. The slx months forward rnte ls13% and 11% raspectlvely. The current
LAra 297.00/Pv.
1. Where should a French Investor lnvest 7
2, Where should he borrow from ?
3. Is thhere any arbltrage
opportunlty for tho lnvestor7
4. What should be the forward , y 4 an ayet in
exchange rate so that there ls noSpa o
Spot Rate for US$ = Rs. 42
arbltrage oppoYtunlty. Pnjir { m pnte
9,18.
The rate of investor in lndia is 12% p.a. and in New York ls 6%
knc,
The bank has p.a.
to quote 3 months sellng rate lo n customer. Ansumlng that the Interest rate parlty holds,
find the quote ?

Q.19. A fAnancial manager of a Frenclh Company has FF 25 milllon Uhat she

Invest for a year. She is
considering the possibilty of clther investlng ln France where a ono canInvestment
Germany wlhere one year Investment producos a intercst rate of ylelds
rate of 99h or in ycar interest
exchange rate can be quoted as DM3.35/FE. Calculate one 12%.thatThewillcurrent
year forward exchange rate make
the finance manager indifferent between Investing In France or Germany.
Q.20. Six month T-bills have a nominal rate of 7 percent whlle default-free Japanese bonds that mature in 6
months have a nominal rate of 5.5 percent. In the spot exchange market, 1 yen equal $0.006. If Interest
rate parity holds, what is the 6 month forward exchange rate7-
aha pa hhí pala i wim
Q.21 Indian Rupee is avallabletoyou as under
Spot Rates 20.725 Rs/Singapore $ TapanAmevicato kuth bhi
lel
= 0.04825 SG $/Rupee
90 days rates = 20.687 Rs. /Singapore $
0.04834 SG $/Rupee
Singapore prime lending rate is 9.5%
Note-Using 365 days in a year.
Calculate
1. Whatis implicit Indian interest rate?
2. Calculate and comment on Indian rate if the forward exchange rate was 0.04795 SG $/Rupee ?
3. Calculate and comment on the 90 days forward rate on Rupee/SG $ if the Indian interest rate is
8%2
{Calculate all the answer separately)
vs - wale hmu h u

Q.22. Exporters Plc. A UK company is due to recelve 500,000 Northland dollars in six months time for good
supplied. The company decides to hedge its currency exposure by using the forward market. The short-
term interest rate in the UK is 12%p.a. and the equivalent rate in Northland is 15%. The spot rate of
exchange is 2.5 Northland dollars to the pound. Calculate how much Exporters Plc. Actually gains or
loses as a result of the hedging transactionifattheendof the six months, the pound in relation to the
Northland dollar has () gained 4% (i) lost 2% or (iii) remained stable. You the interest Rate Parity
analysis of forward rates)
The United States Dollar is selling in India at Rs.45.50. If the interest rate for a six month borrowing in
Q23. India is 8% per annum and corresponding rate in USA Is 2%,
a. do you expect United States Dollar to be at a premium or at discount in the India forward
market
b. what is the expected six month forward rate for United States Dollar in India and
c. what is the rate offorward premium or discount?

0.24 a. R in Japan is 6%p.a. whilethat in lhudia is 3% p.a.Spot Rupee/ Yen s 0.4002 and the twelve
month yen rate is 0.388874. You wish to invest Rs.100,000 in risk free investments for one year.
will you invest the Rs.100,000 in India or convert it into yen and invest in Japan.
b. Data same as in above example exccpt that you have 100,000 yen. Would you invest in India or
in Japan ?

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CMAFina n hua to t) det. hua to ess-Buy mor Forex
Gonk Se{t tavva
2Jht Vav- lerge ctak Kya rr har
25. Following are the rates quoted ht Bombay for Brltish pound: du ka hai
Bank Rs./BP 52.60/70 Interest Rates India London
mForward 20/70 3 months
8%
ohey 6m Forward. 50/75 5%
6 months
Verlly whether there is any scope for covered interest arbitrage10% 8%
lf you borrow Rs. 1,00,000.
26. The following table shows
franc. The spot exchange rateinterest
rates
and exchange rates for
the United States dollar and French
is 7.05 francs per dollar. (Complete the misslng entries)
3 months
Eurodollar interest rale 114% 6 months 1 year
(annually 12%%
compounded)
hdEurodellar-interest rate | 19% Frwend
(annually 20% prêmls
compounded) hanesba
Forward trancs per ?
7.52 orein
dollar wrrtny
Forward discount on
(rancpercent per year
6.3% dnt dil
27, Current spot exchange rate between US$ and Indian
Rs. 43.52/ USS. The expected inflatlon rate is 8.5% In rupee ls Rs. 40.11/USS. One year forward rate is
Indla. What is the
expected Inlatlon rate inUSA ?
Q.28. Sampras Tennis Rackets Cost UKP 100 in the UK and 150 in
the US. The current
1-$1.50. exchange rate is UKP
Explain what happens if inflation-which is presently 8% in both the UK and the US
the US? Increases to 10% in

Q.29 In 2008 Transistof cost Sin-NewYork, S$69n Singapore and3240 rublesin Moscow.
a. 1f the law ot one price held
what was tie exchange rate between US dollars and Singapore dollar
?Between US dollars and rubbles?
b. The actual exchange rates in 2008 were S$ 1.63
=USS and 250 rubles =US$1.
Where would you prefer to buy
your Transistor ?kaha se le7c os
Q.30. You are told that the spot rate is $ 1.65/£. The expected inlation rates in UK and USA for the next three
years are given below:
Year UK Inlation(%) Foiin US Inflation(%) kom
3.0 2.0
2.
3.5 2.5 Ater 18
mon th KD
3.
3 2.0 banl k *
de nas orF°lenap
Calculate the expected $/£ spot rate after three years. Gon Foveign ureny leva
Q.31. A Buy karra hai
glass manufacturer in India is tendering for an order from Kuwait. The tender conditions state
payment will be made in Kuwait Dinars in 18 months from now. The company is required to offer thata
price in KD. The marginal cost of producing the glass is Rs. 290 per sft. The tender quantity is 200,000
sq. foot of glass. The normal mark up is 25% on marginal cost. The Rupee/Dinar spot rate is 159.20-30.
Annual inflation rate in India is J% and in Kuwait is 3%.
Recommended what Kuwait Dinar price should
be quoted in the tender by the Indian by glass manufacture for supply of 200,000
sq.ft. of glasS.
In India the rate of interest on one year loan is 14.5% and inflation is expected to be 6.5%. The inflation
Buy set
Q.32.
expected in Thailand is 8.5%. What should be the interest rate of one year loan in Thailand?
Interestrate at Germany = 11%
Q.33.
Expected inflation rate is 5%
British interest rate is 9%
Find out British inflation rate. 62

Q.34.LB. Inc. is considering a new plant in the Netherlands. The plant will cost 26 million Guilders,
Incremental cash flows are expected to he 3 Million Guilders per year for the first 3 years, 4 Million
Guilders the next three, 5 million Guilders in year 7 through 9, and 6 Millon Guilders in years 10

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 CMA Final

Forex
through 19, after which the afterwhlch
exchangee rate
rate is 1.90 Gullders
Guilders per $. Thethe proje
per$. The renuttW termínate with no resldual value. The present
. f the exchange rate stays at 1.90 requlredtherate of return on repatriated S is 16%
hIf the guilder whatis project net present value ?
165 for yearsappreciates
10-19 what
to 1.84 for years 1-3, to 1.78 for
happcns to tlhe net
years 4-6 to 1.72 for years 7-9 and to
present value 7
T company a U.K.
company considering undertaklng a new project In
1s
Q.35. r e immediate capital Australla. The project would
he Drojects four year life.expenditure
The t
of AS5m of
working capltal which would be recovered at the
ne cash flows cxpected to be end
hefore tax. Stralght-line depreciation over the Ife of generated from the project are AS
13m
pany tax in Australla, which is charged at the rate of the project ls an allowable expense against
50% payable at
project will have zero scrap value. each-year without delay. The
KT company will
not have to pay any UK tax on the project
agreement CAl¢alalu Np Jni tial cash vnthlew due to a double-taxation avoidance
The A$/UKP spot rate is 2.0 and AS Is expected to
depreclate agalnst the UKP by 10% per year.A similar
Hck. Uk-based project would be expected to generate a minimum return of 20%
On December 27, 2005 a
after tax
Q.36. customer requested a bank to remit
import of diamonds under an irrevocable LC. However DG 250.000 Holland in payment of
to
due to bank strikes the
remittance only on January 3, 2006. The interbank market rates were as follows bank could effect the
December 27 January 3
Bombay $100 $/Rs. 3.15-3.10 3.12-3.07
London S/pound: 1.7250/60
1.7175/85
DG/poundd 3.9575/90D 3.9380/900
The bank wishes to retain an exchange margin of 0.125%. How much does the
orlose due to the delay? customer stand to gain
We ko
Q.37. On January 28, 2005 an
importer customer bolt do hum
under an irrevocable LC. However due to requested bank
a to remit
Singapore Dollar (SGD) 25,00,000
bank strikes the bank could effect the remittance only on
February 4,2005. The inter-bank market rates were as follows:
January 28
February 4 Bank
Bombay US$ 1 = Rs. 45.85/45.90
London Pond1 = US $ 1.7840/1.7850 45.91/45.97
Pound 1 SGD 3.1575/3.1590 1.7765/1.7775
The bank wishes to retain an exchange margin of 0.125%. How 3.1380/3.1390
much does the customer stand to
orlose due to the delay? gain
Q,38. Other things being equal determine whether arranging for invoicing in rupees is
followingcases: advantageous in the
a. KT Ltd. is
exporting pepper to a trade in New Jersey for an invoice value of
Payment terms are 90. days . Spot rate Re.1/$ is 42.16-36. Rupee is expectedRs.84,32,000/-
to gain. Is it
advantageous to invoice in Rupee?
b. Maruti Enterprises and Co. Diburgath ynda
Appreu l
îmports spare parts for machine from messrs. Magayachi,
Osaka, Japan, Valuc of consignment is Rs.13,25,000/.
balance 50% in 180 days from data
Payment terms are 50% in 90 days
of shipment
of what the forward rate would be is not available
from Japan. Spot rate Re./40.4010. An estimate

in synchrony with S. Rupee may either

though it is known that ¥ is expected to move
gain or lose on $. Is it advantageous to have the import in
Rupee.
Q.39. lcenole Glass co. Ltd. has exported goods worth Kuwaiti Dinars 20,000. Kuwaiti buyer has
credit period of 90 days. Exchange rates for this sought a
currency read as Spot Rs.154.10, 3-month forward
Rs.155.80. Should lcenole accept the credit terms or insist on immediate
changeif interest rateseinnIndia payment ? will your decision
for hai bY dLna
a bhiborrowings is 8%bhiandhai
for investment are 6%2 me Convef kase
Q.40. High-end Garments (HEG) in India and Tcys and Trains in Tokyo have been trading
other. HEG imports toys
from regularly with each^uf
Japan. The firm in Japan imports fashion garments from HEG.
from India invoiced in.Show how the accounts are settled
are Exports
Toys and Trains to pay to
if netted
hHEG owes to Toys and Trains
Hgennda Rs. 24,45,000
i Spot Re/Yen Yen 15 lacs
0.3700-3750
aICA Ketan Thakkar (AIR)
GPenay aage's
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kaam karne
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 Forex
CMAFnal
and
has subsldlarles In UK, Kurolan
Q41. Agroup of companies is these
controlled rom the USA, This graun
are referred to as UK, BL and 31a March, mtercompany
apan. For convenlence IP. As on

indebtednessstood asunder:
Debtor Creditor Amount(In Milllon)_
U K RL.240
UR P Y 120,00
P EL BL 120
E UR Sterling 25
EL P Y 120,00
uS Headquarters follow the multi-lateral netting policy and adopts the following excnange**
US $1 ¬O.90 ; Sterling 0.70; ¥ 120
Compute and show net payments to be maue by subsldlarles after netting of

Q42. A US multinational has its subsidlaries Inter

in Indla. UK and France. Thoe multinationa opuctars, Each
$ubsidiary cash tlow using the netting system and currency contre located at lts heaagu
subsidiary reports its payables to other subsldiaries, on the fArst day of each monu
rement of
intinmate the funds available with them and expected requirement
or
their report these subsidiaries' also
funds for operations by it in that month.
ne currency centre then issues instructions to the net-paying subsidiary on the nfth of each mont
usingthemarket exchange rate on that date. Also thecurrency centre requlres subsidlary companieso
ranster their cashsurplus to the currency center. Deficit_subsldiarles are asked to cover helr
temporary needs by drawing on their averdralt facilities with local banks.
Following iS the summary of the report sent by three subsidiary companies on NMAren l.
| Subsidiaryy Amounts due to other Funds avallable | Funds required for
subsidiary operation March 1
Indian (Rs. 6 3,00,0000 Rs.20,000,000
to UK
subsidiary
Ff 4,000,000 to Fren Rs.100,00,0000 oC 20
subsidiary_
UKE) Rs. 32,500,000
Indian subsidiary
to

Ff 10,000,000 to French £50,000 £ 2,000,000

subsidiary
France (F) Rs. 150,000,000
Indian subsidiary
£ 2,000,000 to UK | Ff50,000,000 Ff 20,000,000
subsidiary
Spot exchange rate on March 5, are as follows:
$1 Rs.48.00
£1 $ 1.60
$1 Ff7.00
a. Design a netting system for allthree subsidiary companies.
b. Determine the total funds available to the currency center for money market investment during
March.
Which subsidiary will be using local overdrafts and ofwhat amount ?
e
The finance director of P Ltd. has been studying exchange ratesandinterest ratesrelevantto India and
43. USA. P Ltd has purchased goods from the US Co. at a cost of $ 51 lakhs payable in dollarsin 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 Rs. 22 crores.
Exchange rates Rs/Dollar
Spot 40-42; 1 month forward 41-43 3 month forward 42-45
Interest rates (available to P Ltd.) san
palym e, 7
India USA
lenae hm
Deposit Borrowing Deposit Borrowing
rate (%) Rate(%) rate (%) Bak dega a
Rate(%) 10.00
1 month 13.00 15.00 7.00

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CMA
Final
Forex
3 months 13.00 16.00
Calculate whether it is posslble for P Ltd. to 0.00 11.00
more than RS. 22 achlove a cost directly as5oclated with this
Crores by means of a forward
costs may be lgnored.
transaction o no
markot hodge or monoy market hedge.
Transituo
Q44. Marble& Granites Jabalpur have debts
months are estmated at SGD 49,750. outstandlng In Slngapore, Neallzatlons at the end or
Spot SGD is Rs. 12.68-76 tre
3m forward if Rs. 12.40 50
Al an
Cpovtth hum Ml
Additional Informatlon on Interest rates ls as
under:
Borrow Lend
Singapore 12%
India 10%
9%
What are the 7.5%
alternatives avallable to Marbles & Granltes
would recommend gliving rcasons. to minimlze Rlsks? ldentlíy one
na yo
045 KT Ltd. London will have to
make
hume dena has PamuKOha hus
a
payment of $3,64,897 in slx month's time. It is
oD
The company is consldering the varlous currentuy
cholces It has in order of hodge lts transactlon
Exchange ratess ou expoSure
Spotrate ($S/E) $ 1.5617-1.5773
Six month forward rate
$1.5455-1.5609
Money market rates:
Borrows (%) Deposit (%)
Us (USA) 6 4.5
UK(London) 7 5.5
By making the appropriate calculations decide which of the following hedging alternatives Is the most
attractive to KT Ltd.
a. Forward market
b. Cash (money) market
milna hai hume
Q.46 As Ltd.
is an
importer/exporter
of textiles and textile
extensively with countries throughout
machinery. It is based in the UK but rades
a smáll subsidiary based in
Europe. It has
company is about to invoice a customer in Germany DM750,000 payable In three month'sCermany.
time. KT Tne
Ltd.
treasurer is considering two methods of
hedging exchange
the risk.
Method 1 :Borrow DM750000 for three months, convert the loan fnto sterling and repay the loan
out of eventual
receipts. mon mankek
Method 2: Enter into a three-months forward exchange contract with the company's barmk to sell
DM750,0000
The spot rate of exchange is DM2.3834 to the £ 1.
The three-months forward rate of exchange is DM 2.3688 to the £ 1.
Annual interest rates for three months
borrowing are : Germany 3 percent,: UK 6 percent
Requlrements
a Advise the treasurer on:
1. Which of the two methods is the most financially advantageous for KT Ltd.
2. The factors to consider before deciding whether to
hedge the risk using the foreign currency
markets in mon AMik
Assume that KT Ltd. is trading in and with developing countries rather than Europe and has a
subsidiary in a country with no developed capital or currency markets. KT is now about to
invoice a customer in that country in the local currency. Advise KT. Ltd. treasurer about ways in
which the risk can be managed In these circumstances.
On March 1,2005 B Ltd. bought from a forelgn firm electronic
10L
Q.47. equipmenthat réquire
will the payment hume
of LC 900,000 on May 31, 2005. The spot rate on March 1,200S is LC per dollar, the expected future
spot rate is LC 8 per dollar and the ninety-days forward rate is LC 9 per dollar. The US Interest rate is
12 percent and the foreign interest rate is 8 percent. The tax rate for both countries is 40 percent.B
Ltd. is considering three alternatives to deal with the risk of exchange rate fluctuations.
a. To enter the forward market to buy LC 900,000 at the
ninety-days forward rate in effect on May
31,2005

we mpo C local wnum

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 CMA Finol
Forex
b. To
borrow
invested
LC900,000
an
n on
amount
government
In dollars to
securltles of buy
May 31 200E the LC at
the foretgn country. With the
the current spotinterest income, it will equal
rate. This mon
To wait
until May 31,2005 and
buy LC at whatever
alternatives should Whlch
minimise its cost ofprevalls
the B Ltd. follow spot rate atthetna
in LCs/. Explaln. in order to
meeting future m
paye nt

Q48./ McDonnoughs
time. Hamburger Company wishes to lend
Sony Industries is interested in $ 50o.000 Its
making medium-term loan of Japancese subsidiary. i
to
its U.S. nt to
subsidlary. The two
making parallel loans. partles are
a
approximately
brought together by an Investment tne 5
percent Principal andMcdonnoughs bank for tne pu of
will lend $
Interest are payable S00,000 to the U.S. subsidíary of Sony 13
compounding annually. Sony will only at the end of the fourth int
yearsat
109% Again the princlpal and Japanese subsidlary of McDonnougns year
Current exchange rate
lend the
Interest (annual he end.
dollar per year over theIs 140 Yen to the $. However compounding) are payabie a
the dollar is
The
a.
next 4 years. expected to decline 0y "
hese
interest expectations prove to be correct, what will
payments to be the dollar equlvalent of d
Sony at the end of 4
years/ principal and

DWnat total dollars will McDonnoughs

and intercest recelve at the end of 4 years from the
on its loan payment of
G Which party is better offby the U.S. subsidlary of
Sony? principa
d. What would with the parallel loan
happen if the Yen did not arrangement ?
Q49. Consider the following rates at which A (a party with change in value?
credit rating) can borrow at superior credit rating) andE (a party wtn
fixed rates and loatingrate markets.
Party Name
Fixed Rates Floating rates
9%
LIBOR
(LIBOR L11%
London Inter Bank |LIBOR +0.5%
offer Rate]
Ais interested borrowing on loating rate basis and
in
Whelher swapping of interest Bis interested in borrowing on xed rate
rate is
possible keeping princlpal sum equal benefiting both the basis.
Q,56. Companies KT and XY face the following parues
interest rates
KT XY
U.S. dollars (loating rate)_ LIBOR+ 0.5%
Canadian (fixed rate)_ 5%
LIBOR+1.0%
Assume that Kt wants to borrow U.S. 6.5%
dollars loating rate of interest and XY wants to borrow
at a
Canadian-dollars f/xed at a
rate of interest A financial ínstituation is planning to arrange a swap and
requires a 50 basis point spread. the is 1If swap equally attractive to KT and XY what rates of interest will
KT and XY end up paying? 5
Q,51. Grade Ltd. enjoys a high credit rating and is capable of raising term funds either at a
p.a. or at a loating.rate of 40 basis points over MIBOR, Levels Ltd. fixed rate of10%
and is able to borrow either at 80 basis enjoys a relatively lower credit rating
borrow at fixed rate whereas Grades
points over MIBOR or ata fixed.rate of 11%. Levels-Ltd. wants to
such that Grades gains,2/3rd of the
would like to enjoy a floating rate. Structure a swap arrangement
total gain.
Assume that there are no íntermediaries invclved.
Q.52. At two forex centres, the following Rs. -US Srates are quoted:
London Rs. 47.5730-47.610o kohe Se g le kar koha dina hal
Tokyo Rs. 47.6350 47.6675
Ye dekhna hai ke prohl kaha
Find out arbitrage possibilities for an arbitrageur who has Rs. 100 million. hora hai väise he lenge.
Q.53. The following are three quotes in three forex markets:
1S= Rs. 48.3011 in Mumbai
1£ Rs.77.1125 in London
1£ $1.6231 in NewYork
Are any arbitrage gains possible 7 Assume there are no transaction costs and the artbitrageur has US s
1,000,000.
CA Ketan Thakkar (AIR)
Page 8

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CMAFinal

Forex
Giventhe following:
S/E
S.Fr/DEM 1.3670/1.3708
S/S.Fr 1.0030/1.0078
And if 0.8790/0.0803
DEM/E In the market are
Find out it any aro
1.5560/1.5576
generate risk- less profit opportunity if so show how can
how can $ 10,000 available with you can be used to
$ 10,000 available wlth you
nk entered
into an
agreement with Its customer on 15th March
M 4000/- delivery on
15th April the custoneri
July Rs. for forward pura
28.14/DM, covering itself by 816/DM. On
amOunt that woula De palarequests the bank to forward a
to the purchase DM 4000 under sei act. Calculate tne
15th April. customer assuming the following
sSuming this inter bank market on
following rates
rates in
in the
the
int
Spot DM 1=Rs. 28.1025/1075
Delivery July DM 1Rs. 28.6475/6550
tnterest on outlay oi unds is 18% and inflow is
18% and inflow is 12%
The bank has agreed on 20th Feb that it
6. E7/..On the same day the bank covered will sell on 20h Aprll to the
customer u
n April@ 42.55. On 20th March its
the customerposition by purchasing o arket due
Garward anproached C 10000/-
contract the
earier entered into. The rates prevailing in the bank to sell US $ 10000 under ue.
Spot
A p r i l
Rs. 42.4725/ 4800
n
interbank market on are

Rs. 42.2550/2625
tlay
of sunds @ 18 % and on inflow of
Interest on outla
Wha s the amount that would be recovered funds@ 12%
from the customer.
Vou sold Hong olar
Qs57. on market Kongon the same
100,00,000 value spot to your customer at Rs. 5.70 &coverea yo
day when the exchange rates were
US$ 1 H.K. $ 7.5920
N L.ocal inter bank market rates for US $ were
1 =42.70
Spot US $ 42.85
Calculate cover rate and ascertain the profit or loss in the
transaction.Ignore brokerage.
An Indian company wants Rs. 10,00,000 for a period of 3 months. The following information is availaoie
Q.58
in respect of exchange rate:

Exchange Rate Spot 3 months forward

RS.E Rs. 53.25 Rs. 54.80
Rs./S Rs. 34.70 |Rs. 35.95
Rs./ DM Rs. 24.20 Rs. 25.15
RS./FF Rs.7.10 Rs. 7.355
The interest rate tor 3 months borrowings are:
Re. 18.00%
E 7.50% wa pomd
6.25% Amiita Pela Deukche Mark
DM 5.50% Dench Mank erman b A
FF 7.00% Fneh Franc > F e
What is the best option for the company ? If the 3 months rates as follows what should the company do?
Rs. 54.30
Rs./$ Rs. 35.60
Rs./DM: Rs. 24.85
Rs./FF Rs.7.20

Thakkar (AIR)
Page 9
CA Ketan

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 NATIONAL FINANCE
mportey- wep a Relevant s spot
M Ltd. of Calcutta has lo remit GBP 250000 by the end of 3 months to& ld of UK.
rate is
Rupee per GBP 72.35 72.60
3 month forward rate is Rupee Per GBP -72.65 7300
-

GBP
(A) On due late M lul decides not lo pay and hence canccls the contract Spot rr
ion.
72.10-72.50. One month followed rite is Rupee Per GBP 72.50-73.00 which is the os
ae on
(B)Two months after into the forward contract, M ltd cancels the Contract, Spot
entering
that dateis
rupee per GBP 72-73. One month forward raté is rupee per GBP 725-72.00
(C) What is the Gain or Loss on cancellation.
(D)Re-Compute if M Ltd was to received GBP 250000
as
A Lta.
imported Goods worth 1 lakh USD from B Ltd, Pavable
A Itd has on 31 December.
was rupee per
entered in to a forward contract maturing on 31 December. When the rate offerea
USD 47.5-48.5 Sevdinn Ral
(A) Today is 31t December, A Itd wants to honour the contract what action will iolow
USD
(B) Today is 30th November, spot rate Per USD - 47.48 one month forward rate is rupee Pe

47.25-48.25 what action will follow if he wants to honour today

(C)If Altd was an exporter, what action will follow in question 1 above
(D) Ifa ltd was an exporter, what action will follow in question 2 above
L Ltd has exported Goods worth 3 lakh USD to U ltd on 1t august and inmediately took a 3 nmor

month 1orward
forward cover. On that date rate is rupee per USD -45.75 45.75 46.00 three
spot
rate is Rupee Per USD :45.50 -45.75.
The sum is expected to be realized on 31 October is
due date. Spot rate
(a) On 30 September U Itd. informs L Itd. a further one month delay from
45.40-45.60 two -

USD
Rupee per USD. 45.35-45.65, one month forward rate is Rupee per
-

month forward rate is Rupee per USD 45.55-45.65, what are the implication?
rate
IF U Ltd. informs you a further one month delay only on October and 1 month forward
31s
(b) Rate on
on that date were to be Rupee Per USD 45.55-45.65.
What are implications? Spot
the
31st October is rupee Per USD 45.20-45.55
T Ltd. has to Pay $6145 to R Ltd., of USA in 3 month from today, the prevailing rates are:
2.4.
three month forward rupee per USD 53.2-53.45
rate is -

Spot rate is rupee per USD: 52.40-52.85. entered and take a forward
One month from today T Ltd. decided to cancel the forward contract
covers for3 months from that day, what is the cost of rollover if any. Spot rate is rupee per USD-
53-54. Three month forward rate is rupee per USD-52.60-52.95 two month forward rate is Rupee per
USD - 54-55
IfT Itd. approaches for rollover on due date of the original contract for a one month rollover what
will be the result Spot rate on that date is Rupee per USD 52.60-53.60. Which one month forward
52.50- 53.50
Rate is Rupee per USD
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