01 - Forex-Question Bank

7th Edition
CA Final | CMA Final | CAP - III
Advanced / Strategic
Financial Management (AFM/SFM)
Question Book
CA. Nagendra Sah

FCA, CFA L1, B. Sc. (H), Vishwa Sewa Ratna Award (2022)
winner from World Service Organization, Stock Market
Expert, Highest Mark scorer in SFM, Best paper award
winner in Mathematics and Statistics in B. Sc.
// CA NAGENDRA SAH // WWW.NAGENDRASAH.COM

COVERAGE
This book covers wide range of questions and sufficient to score more than 90 marks in both CA Final and CMA
Final. No need to refer any modules of ICAI or other reference books.
This book contains following questions:
(i) CA Final New Scheme Study material issued by ICAI,
(ii) CA final Old Scheme past examinations question for common topic,
(iii) CMA Final past examinations Question,
(iv) Revision Test Paper questions of Both CA and CMA
(v) Mock Test Paper questions of both CA and CMA
(vi) CMA Compendium and
(vii) Selected questions from foreign writer books.
Every effort has been made to avoid errors or omissions in this edition. In spite of this, error may creep in. Any
mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition.
No part of this book may be reproduced or copied in any form or by any means without the written permission of
the publishers. Breach of this condition is liable for legal action.

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CA Nagendra Sah
CA Nagendra Sah is a widely acclaimed Chartered Accountant in the field of Financial Management,
qualified Chartered Accountancy with highest Marks in Strategic Financial Management (SFM). He teaches
SFM to CA/CMA final students and Cost and Management Account and Financial Management &
Economics for finance to CA-Inter Students. He has cleared all the levels of CA examinations in his first
attempt. He completed 12th as well as graduation in Science with Statistics honors from the esteemed
Tribhuvan University. He had been a University Topper and awarded by University for securing highest
marks in Statistics as well as Mathematics.
He is the premier author who wrote Strategic Financial Management (SFM) book for CA Final, Cost and
Management Accounting (CMA) and Financial Management & Economics for finance for CA Intermediate.
His summary book and Revision Lectures Uploaded on YouTube are one of the most popular among CA
Students which is beneficial to revise whole syllabus in very less time with logical explanation.
CA Nagendra Sah is a firm believer of conventional and customary practices being adopting in training and
coaching for over many years. He is a Chartered Accountant who took up teaching as profession, who
believes in a teaching methodology that relates to human brains.
His goal is not only to enable students to pass in CA Exam but also to provide tips and knowledge to earn
money from stock Market by trading in Equity, Bond, Derivative, Currency, commodity and unit of Mutual
Fund. He is a consistent profit maker in Stock market and he got winner’s certificate many times from
India’s no 1 broker Zerodha.
His students get a practical linkage of concept with actual financial data of company and economy. They
get awareness of government policy, RBI policy, Fed policy, global market that affects Indian stock
exchange.
He also provides practical knowledge of excel sheet for financial planning (like, installment calculator etc.)
His intense urge to bring about a sea of radical change in the traditional teaching techniques and
pedagogies has culminated in the form of this institution.
When a bird is alive, it eats ants. When the bird is dead, Ants eat the bird.
Time & Circumstances can change at any time. Don’t devalue or hurt anyone in life.
You may be powerful today. But remember, Time is more powerful than you!
One tree makes a million match sticks. Only one match stick needed to burn a million
trees. So be good and do well.

Contents
Chapter Pages
1. Foreign Exchange Exposure and Risk Management (FOREX) .. ……….. 1.1 to 1.42
2. Stock Exchange ………………………………………………………...... 2.1 to 2.1
3. Time Value of Money (TVM) ….……………………………………….. 3.1 to 3.3
4. Mutual fund …….………………..……………………………………… 4.1 to 4.14
5. Derivatives Analysis and Valuation ………….………………………… 5.1 to 5.40
6. Portfolio Management ..………………………………………..……….. 6.1 to 6.48
7. Security Valuation …….……………………………………………….. 7.1 to 7.50
8. Interest Rate Risk Management (IRRM) .…….…………..……………. 8.1 to 8.16
9. Merger, Acquisition & Corporate Restructuring [Not for CMA] ..……. 9.1 to 9.24
10. Business Valuation [Not for CMA] ..…………………………………….. 10.1 to 10.14
11. Risk Management (VAR) [Not for CMA] ……………………………….. 11.1 to 11.2
12. Security Analysis ……………………..…………….…………………… 12.1 to 12.4
13. Advanced Capital Budgeting .………………………….………………… 13.1 to 13.36
14. International Financial Management [Not for CMA] ……….…………… 14.1 to 14.10
15. Investment Decision (Project Planning and Control) [Not for CA] …...… 15.1 to 15.14
16. Leasing Decision [Not for CA] …………………………………………. 16.1 to 16.14
17. Miscellaneous [Only for Cap-III] ………………………………………… 17.1 to 17.8
18. Tables ……………………………………………………………………. 18.1 to 18.12

Chapter 1
FOREIGN EXCHANGE EXPOSURE
AND RISK MANAGEMENT
LEARNING OUTCOMES
After going through the chapter student shall be able to understand

❑ Factors affecting foreign exchange rate
❑ Role of SWIFT in Foreign Exchange
❑ National International Payment Gateways
❑ Exchange rate determination
❑ Foreign currency market
❑ Management of transaction, translation and economic exposures
❑ Hedging currency risk
❑ Foreign exchange derivatives – Forward, futures, options and swaps (Covered in Derivative Chapter)
FOREX FOREX

1.2 ADVANCED | STRATEGIC FINANCIAL MANAGEMENT
BID/ASK, PREMIUM / DISCOUNT; SWAP POINT

Question No. 1A [SM-2023] [June-2009-6M]
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 $ 76.00/76.25 77.00/77.50
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-MTP-D23-6M] [CMA-SM22] [CMA-MTP-Dec-21-9M] [CMA-J18-6M] [CMA-J15-6M]
Ans: (i) US $ 32,468; (ii) 152,50,000; (iii) Better to encash Today (T: 53,31,400; 2M: 53,13,000)
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
What is the rate of appreciation or depreciation of each currency over the period?
[CMA-RTP-Dec-2014]
Ans: Pound = +6.41%; Canadian dollar = +4.49%. Euro = +12.09%; Yen = +0.85%.
Question No. 1C
Following are the USD/INR spot and 3-month forward quotes available. Which currency is in forward premium or
discount? Calculate the annualised forward premium or discount.
Spot rate, USD/INR: 75.42/50
3-month swap points: 20/30
[CMA-SM-22]
Ans: $: 1.33% (Premium); : 1.27% (Discount)
Question No. 1D [SM-2023] [RTP-N22] [Nov-2016-5M]

On April 3, 2016, a Bank quotes the following:
Spot exchange Rate (US $ 1) INR 66.2525 INR 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 [CMA-SM-22]
Ans: (i) 115/138; (ii) INR 66.2640/67.6083; (iii) 0.0833%/0.0980%

FOREIGN EXCHANGE EXPOSURE AND RISK MANAGEMENT 1.3
 TEST YOUR KNOWLEDGE

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 1.1 [Nov-2022-8M]
The following two-way quotes appear in the Foreign Exchange Market
Spot Three Months' Forward
₹/US $ ₹ 66/66.25 ₹ 67/67.50
(i) By what % has the Dollar currency changed? Indicate the nature of change. (Answer with reference to the ask
rate).
(ii) By what % has the Rupee changed? Indicate the nature of change. (Answer with reference to the bid rate).
(iii) How many US Dollars should a firm sell to get ₹ 45 lakhs after three months?
(iv) How many rupees is the firm required to pay so as to obtain US $ 2,20,000 in the spot market?
(v) Assume that the firm has US $ 90,000 in current account earning interest. Return on rupee investment is 10%
per annum. Should the firm encash the US $ now or 3 months later?
[RTP-CMA-Dec-2018]
Ans: (i) 7.55%, Premium; (ii) -5.97%, Discount; (iii) 0.67164; (iv) 145,75,000; (v) T:60,88,500; 3M: 60,30,000
Question No. 1.2

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-Dec-2013]
Ans: (i) ¥ 6263; (ii) 50025
Question No. 1.3
Fill the blanks in the following table.
Country USD AUD GBP CAD
US$ - ? (a) 1.8313 0.7623
Australia (AUD) 1.2895 - 2.3615 0.9829
Britain (GBP) 0.6877 0.4235 - ? (b)
Canada (CAD) ? (c) 1.0174 2.4025 -
[CMA-SM22]
Ans: (a) 0.7755; (b) 0.4162; (c) 1.3119
IRPT AND PPPT

Question No. 2A [SM-2023] [Nov-2019-6M] [MTP-May-2019-6M] [Nov-2012-5M] [May-2004-9M]
The US Dollar is selling in India at 72.50. If the interest rate for a 3 months borrowing in India is 6% per annum
and the corresponding rate in USA is 2.75%.
(i) Do you expect that US dollar will be at a premium or at discount in the Indian Forex Market?
(ii) What will be the expected 3-months forward rate for US dollar in India?
(iii) What will be the rate of forward premium or discount?
[CMA Compendium]
Ans: (i) Dollar will be at premium; (ii) Forward rate (/$) = 73.09; (iii) Forward Premium = 3.26%

Question No. 2B
(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-SM-2016] [CMA-RTP-June-2015]
Ans: (i) 40.4762; (ii) 4,547.50; $109.20 & 100 = $2.4013; (iii) Discount 2.805%
Question No. 2C [SM-2023] [M15-Nepal-8M] [Part(i)-M10-4M] [N08-8M] [RTP-N09/M10/M13]

(i) The rate of inflation in India is 8% per annum and in the U.S.A., it is 4%. The current spot rate for USD in India
is  46. What will be the expected rate after 1 year and after 4 years applying the 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?
[CMA-RTP-Dec-2014]
Ans: (i) Expected rate after 1 Y =  47.77; after 4 Y =  53.50; (ii) FR 1 US $ = UK £ 0.7645
Question No. 2D [Nov-2000-8M] [RTP-N23]

The following table shows interest rates for the United States dollar and French francs. The spot exchange
rate is 7.05 francs per dollar 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-MTP-D23-10M] [CMA-Dec-2013-10M]
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%

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’

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. 2.2 [May-2001-10M]
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 dollar. 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?
(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%
Question No. 2.3

The inflation rates in India and the UK are 2.5 per cent and 5.5 per cent respectively. If the exchange rate at time
zero is 79/£, calculate expected exchange rate a year later and expected change in spot rate. Also calculate the
inflation rate differential and verify if PPP holds good.
[CMA-SM22]
Ans: expected exchange rate 81.3122; 2.93%
Question No. 2.4

Exchange rate between Rupee and Swiss franc is 33/SFr at the reference period and the forward rate is found to
be 33.40/SFr after 9 months. Nine-month interest rate on Rupee is 8% p.a. What should have been corresponding
interest rate on Swiss franc? Show that interest rate differential is equal to forward premium or discount.
[CMA-SM22] [CMA-MTP-D23-7M]
Ans: interest rate on Swiss franc=6.3%; interest rate differential=forward premium=1.21%
Question No. 2.5

You are told that the spot rate is £/$ 1.8313
The expected inflation rates in the UK and the US for the next three years are given below.
Year UK Inflation (%) US Inflation (%)
1 2.10 1.60
2 2.15 1.65
3 2.25 1.70
Calculate the expected £/$ spot rate after three years.
[CMA-SM22]
Ans: $1.8037/£

FORWARD CONTRACT HEDGE

Question No. 3A [SM-2023] [May-2003-6 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
Total 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-08-4M] [CMA Compendium]
Ans: (i) $ 1.81; (ii) Firm do not sell pound under forward contract.
Question No. 3B [SM-2023] [RTP-Nov-2019] [Nov-2018-5M] [Nov.-2004-4 Marks]

Digital Exporters are holding an Export bill in United States Dollar (USD) 5,00,000 due after 60 days. They are
worried about the falling USD value, which is currently at 75.60 per USD. The concerned Export Consignment
has been priced on an Exchange rate of  75.50 per USD. The Firm's Bankers have quoted a 60-day forward
rate of  75.20. Calculate:
(i) Rate of discount quoted by the Bank, assuming 365 days in a year.
(ii) The probable loss of operating profit if the forward sale is agreed to.
[CMA-Compendium]
Ans: (i) Annual Discount = 3.22%; (ii) Probable loss = 1,50,000
Question No. 3C [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-13-5M]
Ans: (i) If strengthen by 5%: Loss = 33,653.6 FRF; (ii) If Weaken by 5%: Gain = 37,200 FRF
Question No. 3D [SM-2023] [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

Question No. 3E [SM-2023] [Dec-2021-8M] [Nov-2003-6 Marks]
A Japanese Company effected sales to X Ltd., an Indian Company, the payment being due after 3 months. The
invoice amount is JPY 216 lakhs, at today’s spot rate it is equivalent to 50 lakhs. It is anticipated that exchange
rate will decline by 8% over the 3 months period and in order to protect the JPY payments, the importer proposes
to take appropriate action in the foreign exchange market. The 3 months forward rate is presently quoted as JPY
4.12 per rupee.
You are required to calculate the expected loss and show how it can be hedged by a forward contract.
[CMA-MTP-June-2014-5M] [CMA-June-2013-5M] [CMA Compendium]
Ans: Expected exchange loss = 4.41 Lakh; If hedged by a forward contract actual loss = 2.43 Lakh, i.e. Hedge amount 1.98 lakh
Question No. 3F [SM-2023] [Dec-2021-8M] [RTP-Nov-2012] [May-2008-8 Marks]

A company is considering hedging its foreign exchange risk. It has made a purchase on 1st July 2022 for which it
has to make a payment of US$ 60,000 on December 31, 2022. The present exchange rate is 1 US $ = 65. It can
purchase forward 1 $ at 64. The company will have to make an upfront premium @ 2% of the forward amount
purchased. The cost of funds to the company is 12% per annum.
In the following situations, compute the profit/loss the company will make if it hedges its foreign exchange risk
with the exchange rate on 31st December, 2022 as:
(i) 68 per US $.
(ii) 62 per US $.
[CMA-SM22] [CMA Compendium]
Ans: (i) Due to forward cover, Gain = 1,58,592; (ii) Due to forward cover, Loss = 2,01,408
Question No. 3G [SM-2023] [As Jan-2021-8M] [Nov-2003-10M]
ABC Co. has taken a 6-months loan from their foreign collaborators for US Dollars 2 million. 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-RTP-Dec-2018] [CMA Compendium]
Answer:
(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. 3H [Jan-2021-8M] [RTP-M23]
XYZ has taken a six-month loan from its foreign collaborator for USD 2 million. Interest is payable on maturity
@ LIBOR plus 1%. The following information is available:
Spot Rate INR/USD 68.5275
6 months Forward rate INR/USD 68.4575
6 months LIBOR for USD 2%
6 months LIBOR for INR 6%
You are required to:
(i) Calculate Rupee requirements if forward cover is taken.
(ii) Advise the company on the forward cover.
What will be your opinion if spot rate of INR/USD is 68.4275?
Ans: (i) 13,89,68,725; (ii) E FR: 69.8845, Take forward Cover; E FR: 69.7825, Still take Forward Cover

Question No. 3I [May-2019-8M]
K Ltd. Currently operates from 4 different buildings and wants to consolidate its operations into one building
which is expected to cost ₹ 90 crores. The Board of K Ltd. Had approved the above plan and to fund the above
cost, agreed to avail an External Commercials Borrowing (ECB) of GBP 10 m from G Bank Ltd. On the
following conditions:
• The Loan will be availed on 1st April, 2019 with interest payable on half yearly rest.
• Average Loan Maturity life will be 3.4 years with an overall tenure of 5 years.
• Upfront Fee of 1.20%.
• Interest Cost is GBP 6 Month LIBOR + Margin of 2.5%.
• The 6 Month LIBOR is expected to be 1.05%.
K Ltd. Also entered into a GBP-INR hedge at 1 GBP = INR 90 to cover the exposure on account of the above
ECB loan and cost of the hedge is coming to 4.00% p.a.
As a Finance Manager, given the above information and taking the 1 GBP = INR 90:
(i) Calculate the overall cost both in percentage and rupee terms on an annual basis.
(ii) What is the cost of hedging in rupee terms?
(iii) If K Ltd. wants to pursue an aggressive approach, what would be the net gain/loss for K Ltd. if the INR
depreciates/appreciates against GBP by 10% at the end of the 5 years assuming that the loan is repaid in
GBP at the end of 5 years?
Ignore time value and taxes and calculate to two decimals.
Ans: (i) 7.91%,  71,100,000 (ii) Total: 12.24 Cr; Annual: 3.6Cr (iii) (54 mill); 126 million
Question No. 3J [SM-2023] [Nov-2019-8M] [MTP-Nov-18-8M] [RTP-Nov-15/May-14] [Nov-2007-8M]

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-RTP-Dec-2018] [CMA-MTP-June-2014-8M] [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. 3.1 [RPT-May-2011]
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. 3.2 [SM-Old]

A UK company, is due to receive 5,00,000 Northland dollars in six months’ 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. 3.3 [MTP-M23-8M] [Nov-2020-8M]
ZX Ltd. has made purchases worth USD 80,000 on 1St May 2020 for which it has to make a payment on 1 st
November 2020. The present exchange rate is INR/USD 75. The company can purchase forward dollars at
INR/USD 74. The company will have to make an upfront premium @ 1 per cent of the forward amount purchased.
The cost of funds to ZX Ltd. is 10 per cent per annum.
The company can hedge its position with the following expected rate of USD in foreign exchange market on 1st
May 2020.
Exchange Rate Probability
INR/USD 77 0.15
INR/USD 71 0.25
INR/USD 79 0.20
INR/USD 74 0.40
You are required to advise the company for a suitable cover for risk.
Question No. 3.4 [MTP-N23-10M] [July-2021-8M]

XP Pharma Ltd. has acquired an export order for 10 million for formulations to a European company. The
Company has also planned to import bulk drugs worth  5 million from a company in UK. The proceeds of exports
will be realized in 3 months from now and the payments for imports will be due after 6 months from now. The
invoicing of these exports and imports can be done in any currency i.e., Dollar, Euro, or Pounds sterling at
company's choice. The following market quotes are available.
Spot Rate Annualized Premium
/$ 67.10/67.20 $ - 7%
/Euro 63.15/63.20 Euro – 6%
/Pound 88.65/88.75 Pound – 5%
Advice XP Pharma Ltd. about invoicing in which currency.
(Calculation should be upto three decimal places).
[CMA-July-2023-8M]

Question No. 3.5 [MTP-Nov-2021-8M] [RTP-Nov-2010]
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. 3.6 [SM-2023] [May-2015-Nepal-8M] [Nov-2009-12M]

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.

Question No. 3.7 [MTP-May-2021-10M] [Nov-2018-8M]
The treasury desk of a global bank incorporated in UK wants to invest GBP 200 million on 1st January, 2019
for a period of 6 months and has the following options:
(1) The Equity Trading desk in Japan wants to invest the entire GBP 200 million in high dividend yielding
Japanese securities that would earn a dividend income of JPY 1,182 million. The dividends are declared
and paid on 29th June. Post dividend, the securities are expected to quote at a 2% discount. The desk al so
plans to earn JPY 10 million on a stock borrow lending activity because of his investment. The securities
are to be sold on June 29 with a T+1 settlement and the amount remitted back to the Treasury in London.
(2) The Fixed Income desk of US proposed to invest the amount in 6 months G-Secs that provides a return of
5% p.a.
The exchange rates are as follows:
Currency Pair 1-Jan-2019 (Spot) 30-Jun-2019 (Forward)
GBP-JPY 148.0002 150.0000
GBP-USD 1.28000 1.30331
As a treasurer, advice the bank on the best investment option. What would be your decision from a risk
perspective? You may ignore taxation.
Ans:
Question No. 3.8
An American importer has purchased goods worth euro 15,00,000. Payments are to be made after 6 months. The
spot rate of Euro is US$ 1.2800/€. The American importer expects depreciation of the dollar against the euro in the
coming months. A New York bank gives the 6-month forward rate as US$ 1.3381/€.
If the American importer makes use of the forward rate to hedge its currency, what is its loss or profit under
following circumstances?
(i) Spot price of euro after 6 months is US$ 1.2800/€
(ii) Spot price of euro after 6 months is US$ 1.3962/€
(iii) Spot price of euro after 6 months is US$ 1.2000/€
[CMA-MTP-June-2020-6M]
Ans: (i) Loss of €87,150 (ii) Gain of €87,150 (iii) Loss of €2,07,150
Question No. 3.9

A company operating in USA has on 1st September 2022 invoiced sales in $ to an Indian company, the payment
being due on 1st December 2022. The invoice amount is $ 13,750. At spot rate on 1/9/2022 it is equivalent to 
10,18,875. The 3 months forward rate is presently quoted at $ 0.01340 per rupee. The importer wants to hedge
half his exposure by a forward contract. Advise the company on hedging transaction by forward contract.
Substantiate your advice through calculation of the pay outs and the net gain or loss due to hedging if the spot rates
are as follows on 1st December 2022.
(i) $ 0.01338
(ii) $ 0.01352
Present your calculation using /$ up to two decimal places. Ignore transaction cost.
Ans: (i) gain= 757 (ii) loss = 4606

SETTLEMENT OF TRANSACTION AT DIFFERENT DATES

Question No. 4A [SM-2023] [Nov-2014-8M]
Gibralater Limited has imported 5000 bottles of shampoo at landed cost in Mumbai, of US $ 20 each. The company
has the choice for paying for the goods immediately or in 3 months’ time. It has a clean overdraft limited where
14% p.a. rate of interest is charged.
Calculate which of the following method would be cheaper to Gibralter Limited.
(i) Pay in 3 months’ time with interest @ 10% p.a. and cover risk forward for 3 months.
(ii) Settle now at a current spot rate and pay interest of the overdraft for 3 months.
The rates are as follows:
Mumbai  /$ spot : 60.25-60.55
3 months swap points : 35/25
[CMA-MTP-June-2015-4M] [CMA-June-2006-8 Marks]
Ans: (i) 61,80,750 (ii) 62,66,925
Question No. 4B [RTP-Nov-2017] [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 [SM-2023] [RTP-Nov-2019] [Nov-2011-6M]
An Indian importer has to settle an import bill for $ 1,30,000. The exporter has given the Indian exporter two
options:
(i) Pay immediately without any interest charges.
(ii) Pay after three months with interest at 5 percent per annum.
The importer's bank charges 15 percent per annum on overdrafts. The exchange rates in the market are as
follows:
Spot rate (/$): 48.35 /48.36
3-Months forward rate (/$): 48.81 /48.83
The importer seeks your advice. Give your advice.
[CMA-SM-22] [As CMA-Dec-2020-8M] [CMA-Dec-2003-8M]
Ans: Immediate payment = 65,22,555; pay at 3 month = 64,27,249
Question No. 4.2
[SM-2023] [MTP-N22-8M] [SSM-2016] [May-2015-8M] [MTP-May-2014-8M] [Nov-2012-8M]
X Ltd. has imported goods from USA worth US$ 10 million and it requires 90 days to make the payment. The
USA supplier has offered a 60 days interest free credit period and for additional credit for 30 days interest is
to be charged at 8% per annum.
(Consider 360 days p.a.)

The banker of X Ltd. Offers a 30 days loan at 10% per annum and its quotes for foreign exchange are as
follows:
Spot 1 US $  64.50
60 days forward rate for 1 US $  65.10
90 days forward rate for 1 US $  65.50
You are required to evaluate the following options:
(i) Pay the USA supplier in 60 days or
(ii) Avail the supplier's offer of 90 days' credit. Advise X Ltd. accordingly.
[CMA-July-2023-8M] [CMA-MTP-J23-8M] [CMA-CMA-June-2018-10M]
Ans: pay in 60 days =  65,64,25,000; pay in 90 days =  65,93,66,689
Question No. 4.3 [SM-2023] [MTP-II-May-2022-8M] [RTP-Nov-2021] [MTP-Nov-2020-10M]

XYZ Ltd. has imported goods to the extent of US$ 8 Million. The payment terms are as under:
(1) 1% discount if full amount is paid immediately or
(2) 60 days interest free credit. However, in case of a further delay up to 30 days, interest at the rate of 8%
p.a. will be charged for additional days after 60 days. M/s XYZ Ltd. has  25 Lakh available and for
remaining it has an offer from bank for a loan up to 90 days @ 9.0% p.a.
The quotes for foreign exchange are as follows:
Spot Rate INR/ US$ (buying)  66.98

60 days Forward Rate INR/ US$ (buying)  67.16
90 days Forward Rate INR/ US$ (buying)  68.03
Advise which one of the following options would be better for XYZ Ltd.
(i) Pay immediately after utilizing cash available and for balance amount take 90 days loan from bank.
(ii) Pay the supplier on 60th day and avail bank’s loan (after utilizing cash) for 30 days.
(iii) Avail supplier offer of 90 days credit and utilize cash available.
Further presume that the cash available with XYZ Ltd. will fetch a return of 4% p.a. in India till it is utilized.
Assume year has 360 days. Ignore Taxation.
Compute your working upto four decimals and cash flows in  in Crore.
Ans: Outflow under option (i)  53.9862 Crore; option (ii)  53.8774 Crore (iii)  54.5341 Crore; Option (ii) same should be opted
MONEY MARKET HEDGE AND FORWARD HEDGE

Question No. 5A [SM-2023] [RTP-May-2019] [Nov-2009-7M] [RTP-Nov-2009] [Nov-2008-6M]
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.
[CMA-SM22] [As CMA-Dec-2019-6M] [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-2023] [MTP-Nov-2018-6M] [RTP-Nov-2012] [RTP-Nov-2009] [Nov-2008-6M]
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]

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.
(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] [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 1st 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 31 st
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. 5F
IP, an importer in India has imported a machine from USA for US $ 20,000 for which the payment is due in
three months. The following information is given is given:
Foreign Exchange Rates (₹/US$) Money Market Rates (p.a.)
(Compounded annually)
Bid Ask Deposit Borrowing
Spot 74.60 74.90 US $ 6% 9%
3 months forward 75.50 75.90 Rupees 7% 11%
(i) Show with appropriate supporting calculations whether a money market hedge is possible or not.
(ii) Compute the cost (in annualized percentage) of a Forward Contract Hedge.
(iii) Present rupee outflow under (i) and (ii) and advice the importer on the best course of action to minimize
rupee outflow.
(Exchange rate and values should be shown upto two decimal places)
[CMA-June-2019-8M]

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
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 [SM-2023] [RTP-May-2015] [RTP-Nov-2013]

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.
[CMA-SM22]
Ans: (i) £ Exposure: Forward = US$ 3,59,244; MMH=£ 3,33,658 (ii) € Receipt: Forward = US$ 1,151,090; US$ 1,098,639

H Ltd. is an Indian firm exporting handicrafts to North America. All the exports are invoiced in US$. The firm is
considering the use of money market or forward market to cover the receivable of $50,000 expected to be realized
in 3 months’ time and has the following information from its banker:
Exchange Rates
Spot ₹/$ 72.65/73
3m forward ₹/$ 72.95/73.40
The borrowing rates in US and India are 6% and 12% p.a. and the deposit rates are 4% and 9% p.a. respectively.
(i) Which option is better for H Ltd.?
(ii) Assume that H Ltd anticipates the spot exchange rate in 3 months’ time to be equal to the current 3 months
forward rate. After 3-months the spot exchange rate turned out to be ₹/$: 73/73.42.
What is the foreign exchange exposure and risk of H Ltd?

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

Ans: €/£ = 1.7234/1.7286
Question No. 6B [RTP-Nov-2020]

Given: US$ 1 = ¥ 107.31
£1 = US$ 1.26
A$ 1 = US$ 0.70
(i) Calculate the cross rate for Pound in Yen terms
(ii) Calculate the cross rate for Australian Dollar in Yen terms
(iii) Calculate the cross rate for Pounds in Australian Dollar terms
Ans: (i) £1 = ¥ 135.21 (ii) A$ 1 = ¥ 75.12 (iii) £ 1 = A$ 1.80
Question No. 6C
From the following quotes of a bank, determine the rate at which yen can be purchased with Rupees.

/£ sterling 75.31-33
£ sterling/ Dollar ($) 1.563-65
Dollar ($)/Yen(¥) 1.048/52 [Per 100 Yen]
[CMA-June-2019-2M]
Question No. 6D [SM-2023] [Nov-2020-5M] [May-14-5M] [As May-13-5M] [RTP-June-09] [Nov-05-4M]

English Bank Ltd. sold Hong Kong Dollar 10 Crores value spot to its customer at  9.70 and covered itself in the
London market on the same day, when the exchange rates were:
US $ 1 = HK $ 7.7506 - 7.7546
Local interbank market rates for US $ were:

Spot US $ 1 =  74.70 – 74.85
Calculate cover rate & ascertain the profit or loss in the transaction ignores brokerage.
Figures are to be rounded off to 4 decimals.
[CMA-SM22] [CS-June-09-4M] [CMA Compendium]
Ans: Cover rate HK$ 1 = 9.6573; Gain = 42,70,000

Question No. 6E [SM-2023] [RTP-May-2020] [MTP-May-2015] [Nov-2013-5M]
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: cover in London; profit 7100
In examination it was wrongly printed as London
Question No. 6F
[SM-2023] [RTP-Nov-18] [May-15-Nepal-5M] [May-14-8M] [Nov-2011-5M] [May-05-8M]
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 affect the remittance 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] [CMA-MTP-D23-7M]
Ans: Loss to customer due to strike = 2,28,250
Question No. 6G [SM-2023] [RTP-May-2020] [May-2018-5M]

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
st
Spot/September 0300/0400 1 month forward 48/49
Spot/October 1100/1300 2nd month forward 96/97
rd
Spot/November 1900/2200 3 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:

Question No. 6H [MTP-M23-8M] [MTP-May-2019-8M] [June-2009-6M]
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?
[CMA-SM-2016]
Ans: (i) CHF 25.866 Lakhs; (ii) 28/12
Question No. 6I [RTP-Nov-2010]
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-months 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. 6.1 [RTP-Nov-2009]
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-2023] [SM-Old] [MTP-May-2015-6M] [May-2014-8M] [RTP-June-2009] [Nov-1998-8M]
JKL Ltd., an Indian company has an export exposure of JPY 10,000,000 payable August 31, 2014. Japanese
Yen (JPY) is not directly quoted against Indian Rupee.
The current spot rates are:
INR/US $ =  62.22
JPY/US$ = JPY 102.34
It is estimated that Japanese Yen will depreciate to 124 level and Indian Rupee to depreciate against US $ to
65.
Forward rates for August 2014 are:
INR/US $ =  66.50
JPY/US$ = JPY 110.35
Required:
(i) Calculate the expected loss if the hedging is not done. How the position will change, if the firm takes
forward cover?
(ii) If the spot rates on August 31, 2014, are:
INR/US $ =  66.25
JPY/US $ = JPY 110.85
Is the decision to take forward cover justified?
[CMA-SM22] [CMA-MTP-June-2020-8M]
Ans: (i) Expected loss =8,38,000; if forward cover taken loss can be reduced to 54,000,
(ii) Loss  1,03,000; 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-RTP-Dec-2018] [CMA-MTP-June-2014-5M] [CMA-June-2013-5M]
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 at 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-MTP-D23-10M] [CMA-TP-Dec-2013-10M]
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
POST SHIPMENT CREDIT

Question No. 7A [Jan-2021-8M]
M/s. Sky products Ltd., of Mumbai, an exporter of sea foods has submitted a 60 days bill for EUR 5,00,000 drawn
under an irrevocable Letter of Credit for negotiation. The company has desired to keep 50% of the bill amount
under the Exchange Earners Foreign Currency Account (EEFC). The rates for /USD and USD/EUR in inter-bank
market are quoted as follows:
/USD USD/EUR
Spot 67.8000 - 67.8100 1.0775 - 1.8000
1 month forward 10/11 Paise 0.20/0.25 Cents
2 months forward 21/22 Paise 0.40/0.45 Cents
3 months forward 32/33 Paise 0.70/0.75 Cents
Transit Period is 20 days. Interest on post shipment credit is 8% p.a. Exchange Margin is 0.1%. Assume 365 days
in a year.
You are required to calculate:
(i) Exchange rate quoted to the company.
(ii) Cash inflow to the company.
(iii) Interest amount to be paid to bank by the company.

RETURN FROM FOREIGN SECURITY / INVESTMENT

Question No. 8A [SM-2023] [May-2012-5M]
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%
Question No. 8B [MTP-May-2019-7M]

With relaxation of norms in India for investment in international market up to $ 2,50,000, Mr. X to hedge himself
against the risk of declining Indian economy and weakening of Indian Rupee during last few years, decided to
diversify in the International Market.
Accordingly, Mr. X invested a sum of Rs. 1.58 crore on 1.1.20X1 in Standard & Poor Index. On 1.1.20X2 Mr. X
sold his investment. The other relevant data is given below:
1.1.20X1 1.1.20X2
Index of Stock Market in India 7395 ?
Standard & Poor Index 2028 1919
Exchange Rate (/$) 62.00/62.25 67.25/67.50
You are required to Calculate:

(i) The return for a US investor; (ii) Holding Period Return to Mr. X.
(iii) The value of Index of Stock Market in India as on 1.1.20x2 at which Mr. X would be indifferent between
investment in Standard & Poor Index and India Stock Market
Ans: (i) -5.37%; (ii) 2.23% (iii) 7560
Question No. 8C [Nov-2019-5M]
A German subsidiary of an US based MNC has to mobilize 100000 Euro’s working capital for the next 12
months. It has the following options:
Loan form German bank : @ 5% p.a

Loan from US Parent Bank : @ 4% p.a
Loan form Swiss bank : @ 3% p.a
Banks in Germany charges an additional 0.25% p.a. towards loan servicing. Loans from outsides Germany attracts
withholding tax of 8% on interest payments. If the interest given above are market determined, examine which
loan is the most attractive using interest rate differential.
Question No. 8D [RTP-May-2022] [Jan-2021-5M]

A US investor chose to invest in Sensex for a period of one year. The relevant information is given below:
Size of investment ($) 20,00,000

Spot rate 1 year ago (/$) 42.50/60
Spot rate now (/$) 43.85/90
Sensex 1 year ago 3,256
Sensex now 3,765
Inflation in US 5%
Inflation in India 9%

(i) Compute the nominal rate of return to the US investor.
(ii) Compute the real depreciation/appreciation of Rupee.
(iii) What should be the exchange rate if relevant purchasing power parity holds good?
(iv) What will be the real return to an Indian investor in Sensex?

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
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%
Question No. 8.2 [MTP-N22-6M] [RTP-May-2022] [July-2021-6M]

Mr. Mammen, an Indian investor invests in a listed bond in USA. If the price of the bond at the beginning of the
year is USD 100 and it is USD 103 at the end of the year. The coupon rate is 3% payable annually.
Find the return on investment in terms of home country currency if:
(i) USD is Flat.
(ii) USD appreciates during the year by 3%.
(iii) USD depreciates during the year by 3%.
(iv) Indian Rupee appreciates during the year by 5%.
(v) Will your answer differ if Mr. Mammen invests in the bond just before the interest payable.
Question No. 8.3 [May-2023-7M] [Nov-2020-8M] [Similar to Q-2.5 Nov-2018-8M]

ICL an Indian MNC is executing a plant in Sri Lanka. It has raised  400 billion. Half of the amount will be required
after six months' time. ICL is looking an opportunity to invest this amount on 1 st April 2020 for a period of six
months. It is considering two underlying proposals:
Market Japan US
Nature of Investment Index Fund (JPY) Treasury Bills (USD)
Dividend (in billions) 25
Income from stock lending (in billions) 11.9276
Discount on initial investment at the end 2%
Interest 5 Percent per annum
Exchange rate (April, 2020) JPY/INR 1.58 USD/INR 0.014
th
Exchange rate (30 September, 2020) JPY/INR 1.57 USD/INR 0.013
You, as an Investment Manager, is required to suggest the best course of option.

[CMA-July-2023-8M]

Question No. 8.4 [MTP-N23-8M] [RTP-Nov-21] [May-19-8M] [RTP-May-18] [RTP-Nov-17] [Nov-
13-8M]
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% p.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?
GEOGRAPHICAL ARBITRAGE
Question No. 9A [SM-2023] [Nov-2008-6M]
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-MTP-Dec-2018] [CMA-PTP-June-14-5M]
Ans: Arbitrage gain = USD 1,12,968
Question No. 9B [RTP-May-2020] [Nov-2018-8 Marks] [RTP-Nov-2014]

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 USD 1,00,00,000. 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


’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
USD 10,000 is lying idle in your Bank Account. You are able to get the following quotes from the dealers:
Dealer Quote
A EUR/USD 1.1539
B EUR/GBP 0.9094
C GBP/USD 1.2752
Is there an opportunity of gain from these quotes?

Citi Bank quotes JPY/ USD 105.00 -106.50 and Honk Kong Bank quotes USD/JPY 0.0090- 0.0093.
(a) Are these quotes identical if not then how they are different?
(b) Is there a possibility of arbitrage?
(c) If there is an arbitrage opportunity, then show how would you make profit from the given quotation in
both cases if you are having JPY 1,00,000 or US$ 1,000.
Ans: (a) No (b) Yes (c) (i) US $ 9.67 (ii) JPY 967.44
Question No. 9.3

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-15-2M]
Ans: Profit = £ 2,424.01
COVER INTEREST ARBITRAGE

Question No. 10A
[SM-2023] [MTP-Nov-2019-8M] [May-2018-8M] [Nov-2014-8M] [May-2006-8M]
Mercy is a Forex Dealer with XYZ Bank. She notices following information relating to Canadian Dollar (CAD)
and German Deutschmark (DEM):
Exchange rate – CAD 0.775 per DEM (Spot)
CAD 0.780 per DEM (3 months)
Interest rates – DEM 7% p.a.
CAD 9% p.a
(i) Assuming that there is no transaction cost determine does the Interest Rate Parity holds in above quotations.
(ii) If yes, then explain the steps that would be required to make an arbitrage profit if Mercy is authorized to work
with CAD 1 million for the same purpose. Also determine the profit that would be made in CAD.
Note: Ignore the decimal points in the amounts.
[CMA-RTP-Dec-2018] [CMA Compendium]
Ans: Arbitrage gain = Can $ 1565

Question No. 10B

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-2005-10M]
Ans: Arbitrage profit $6,197
Question No. 10C [RTP-May-2012]

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.
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. 10D [Jan-2021-8M]
(i) Interest rates for 3 months in USA and Canada are as follows:
Currency Borrow Interest
US $ 4% 2.5%
Canadian $ 4.5% 3.5%
(ii) Can $/US $ spot 1.235 – 1.240

3 months forward 1.255 – 1.260
Advice, the currency in which borrowing and lending for 3 months needs to be done for the US company.
Take 3 months = 90/360 days.
Ans: Borrowing should be made in Canadian $ and lending should be made in US$.


’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 10.1 [SM-2023] [Nov-2018-8M] [May-2016-8M [Nov-2006-5M]
Spot rate 1 US $ = 48.0123
180 days Forward rate for 1 US $ = 48.8190
Annualized interest rate for 6 months – Rupee = 12%
Annualized 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-2017-8M] [As CMA-Dec-2007-6M] [CMA Compendium]
Ans: Yes, US $ 206.95 or  10,103
Question No. 10.2
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-2006-8M]
Ans: Arbitrage gain = 0.0366 million
Question No. 10.3

Your Company has to make a US $ 1 Million payment in three months’ time. The dollars are available now. You
decide to invest them for three months and you are given the following information.
➢ The US deposit rate is 8% p.a.
➢ The sterling deposit rate is 10% p.a.
➢ The spot exchange rate is $ 1.80 / pound.
➢ The three-month forward rate is $ 1.78/ pound.
(i) Where should your company invest for better results?

(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 in the original question,
where would you invest if the sterling deposit rate were 14% per annum?
(iv) With the originally stated spot and forward rates and the same dollar deposit rate, what is the
equilibrium sterling deposit rate?
[CMA-SM-2016] [CS-Dec-2005-15M] [CMA-MTP-June-2014-8M]
Ans: (i) Invest in $ & borrow in £; (ii) Fair FR: £1.7912 = $; (iii) Invest in £; Gain US $ 23,500 (iv) pound rate = 12.58%

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. 10.5 [RTP-May-2012]
[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. 11A
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 … … … … … [CMA-Dec-2004-2M]
Ans: 237,50,000
Question No. 11B [SM-2023] [MTP-May-2015] [Nov-2013-4M]
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
Question No.11C
[SM-2023] [MTP-M22-8M] [N18-8M] [N05-7M] [RTP-N08] [RTP-M13] [MTP-N20-8M]
You as a dealer in foreign exchange have the following position in Swiss 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 68,000
Forward purchase contract cancelled 30,000
Remitted by TT 75,000
Draft on Zurich cancelled 30,000
DD Purchased 8,000
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?
Ans: Buy Spot TT for CHF 5000 and also Buy Forward TT for CHF 10,000


’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 11.1
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-2004-2M]
Ans: $ .2247 mill
Question No. 11.2 [SM-2023] [SSM-2016] [MTP-May-2015] [RTP-Nov-2013]
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. 11.3 [MTP-Nov-2014-5M]
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. 12A
[SM-2023] [May-2022-8M] [Jan-21-8M] [RTP-M15] [MTP-N14-5M] [N08-6M] [Nov-1996-12M]
M/s. Daksh Ltd is planning to import multipurpose machine from USA at a cost of $15,000. The company can avail
loans at 19% Interest per annum with quarterly rests with which it can import the machine.
However, there is an offer from New York branch of an Indian based bank extending credit of 180 days at 2% per
annum against opening of an irrevocable letter of credit.
Other Information:
Spot rate US$ 1 =  75
180 days forward rate US $ 1 =  77
Commission charges for letter of credit at 2% per 12 months.
(i) Justify why the offer from the foreign branch should be accepted?
(ii) Based on the present market condition company is not interested to take the risk of currency fluctuations and
wanted to hedge with an additional expense of 30,000, if so, what is your advice to the company?
Assume 360 days in the year.
[CMA-Dec-2022-6M] [CMA Compendium]

Ans: Option 1: 12,34,413; Option 2: 11,78,869; Option 2 is cheaper.

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 12.1 [SM-Old] [RTP-M23]
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 = 2013.85
 FATE OF FORWARD CONTRACT:

(A) CANCELLATION OF FORWARD CONTRACT [ON/BEFORE DUE DATE]
Question No. 13A [SM-2023] [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. 13B [SM-2023] [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 = 30,175

Question No. 13C
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. 13.1 [SM-2023] [MTP-N23-6M] [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.

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.
[CMA-SM22]
Ans: Loss to the Customer =  27,000

Question No. 13.3 [SM-2023] [Nov-2002-6M]
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
(B) EXTENSION OF FORWARD CONTRACT [ON/BEFORE DUE DATE]

Question No. 14A [SM-2023] [SSM-2016]
th
Suppose you as a banker entered into a forward purchase contract for US$ 50,000 on 5 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 
th th
60.6025. However, on 5 May your customer comes to you and requests extension of the contract to 5 July. On
th
this date (5 May) quotation for US$ in the market is as follows:
Spot  59.1300/1400 per US$

th
Spot/ 5 June  59.2300/2425 per US$
th
Spot/ 5 July  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 14,875. (Rate 59.3017 rounded off to 59.3000)
Rate for booking new contract: 59.5704 (rounded off to 59.5700)
Question No. 14B [SM-2023] [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:
ICAI wrongly quoted Ask tare first.
Spot  62.7200/62.6800
1 month forward  62.6400/62.7400 First rate is Ask rate and second rate is Bid rate.
Determine the extension charges payable by the customer assuming exchange margin of 0.10% on buying as well
as selling. Rates rounded to 4 decimals in multiples of 0.0025
Ans: Cancellation charges payable = 26,250; New booking at 62.5775 (rounded off to 0.0025)

Question No. 14C [SM-2023] [May-2017-8M] [RTP-May-2010] [RTP-Nov-2009]
An importer requested his bank to extend for Forward contract of US $ 25,000 which is due for maturity on 31-
10-2015 for a further period of six month. The other details are as under:
Contract rate US $ 1 =  61.00
The US $ quoted on 31-10-2015.
Spot:  60.3200/60.6300
Six-month premium: 0.86 %/0.98%
Margin money for buying and selling rate are 0.086% and 0.15% respectively.
Compute
(1) Cost to importer in respect to extension of forward contract.
(2) New Forward contract rate.
Ans: Cost to the customer =  18,250; Forward rate to be quoted to the customer is US $ 1 =  61.3175

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 14.1
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
[CMA-RTP-Dec-2014]
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. 14.2 [RTP-May-2015] [MTP-May-2014-5M]

An exporter requests his bank to extend the forward contract for US$ 20,000 which is due for maturity on 31 st
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. 14.3
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. 14.4
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-Dec-2022-8M] [CMA-TP-Dec-2013-10M] [CMA-June-2010-10M]
Ans: (i) 47.52; (ii) 47.95; (iii)  -4 lakh; (iv) 47.99; (v) -2 lakh.

(C) EARLY DELIVERY/EXECUTION OF FORWARD CONTRACT

Question No. 15A [SM-2023] [MTP-N23-8M] [MTP-M21-8M] [M19-8M] [MPT-N18-8M] [SSM-2016]
On 1st January 2019 Global Ltd., an exporter entered into a forward contract with BBC Bank to sell US$ 2,00,000
on 31st March 2019 at 71.50/$. However, due to the request of the importer, Global Ltd. received the amount on
28 February 2019. Global Ltd. requested the Bank to take delivery of the remittance on 2nd March 2019. The Inter-
banking rates on 28th February were as follows:
Spot  71.20/71.25
One Month Premium 5/10
If Bank agrees to take early delivery, then what will be the net inflow to Global Ltd. assuming that the prevailing
prime lending rate is 15%. Assume 365 days in a year.
Ans: [Hint: Swap Difference = 30,000 (Loss); Interest on outlay of fund = 764; Net inflow = 1,42,69,236]
Question No. 15B [Nov-2018-8M]

On 19th January, Bank A entered into forward contract with a customer for a forward sale of US$ 7,000, delivery
20th March at 46.67. On the same day, it covered its position by buying forward from the market due 19th March,
at the rate of 46.655. On 19th February, the customer approaches the bank and requested for early delivery of US$.
Rates prevailing in the interbank markets on that date are as under:
Sport (/$) 46.5725/5800
March 46.3550/3650
Interest on outflow of fund is 16% and on inflow of fund is 12%.
Flat charges for early delivery are 100.
What is the amount that would be recovered from the customer on the transaction?
Note: Calculation should be made on months basis than on day basis.
Ans: 328,358.70

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 15.1 [July/May-2021-10M] [Same as Q.No. 18A-only point (ii) is extra]
On 1st October, 2020 Mr. Guru, an exporter, enters into a forward contract with the Bank to sell USD 1,00,000 on
31st December 2020 at INR/USD 75.40. However, at the request of the importer, Mr. Guru received the amount on
30th November, 2020. Mr. Guru requested the bank take delivery of the remittance on 30 th November, 2020 i.e.,
before due date.
The inter-bank rate on 30th November 2020 was as follows:
Spot INR/USD 75.22-75.27
One Month Premium 10/15
Assume 365 days in a year.
(i) If bank agrees to take early delivery, then what will be net inflow to Mr. Guru assuming that the prevailing
prime lending rate is 18%. per annum.
(ii) If Mr. Guru can deploy these funds in USD, he gets return at the rate of 3% per annum. Which is better?
Why?
.

Question No. 15.2 [MTP-May-2021-8M]
On 1 October 2019 Mr. X an exporter enters into a forward contract with a BNP Bank to sell US$ 1,00,000 on 31
December 2019 at Rs. 70.40/$ and bank simultaneously entered into a cover deal at Rs. 70.60/$. However, due to
the request of the importer, Mr. X received amount on 28 November 2019. Mr. X requested the bank to take delivery
of the remittance on 30 November 2019 i.e., before due date. The inter-banking rates on 28 November 2019 were
as follows:
Spot 70.22/70.27
One Month Swap Points 15/10
If bank agrees to take early delivery, then determine the net inflow to Mr. X assuming that the prevailing prime
lending rate is 10% and deposit rate is 5%.
Note: (i) While exchange rates to be considered up to two decimal points the amount to be rounded off to Rupees
i.e., no paisa shall be involved in computation of any amount.
(ii) Assume 365 days a year.
Ans:  70,44,847
(D) AFTER DUE DATE: EXECUTION, CANCELLATION & EXTENSION

Question No. 16A [MTP-Dec-2021-10M] [May-2018-8M-Modified]
Y has to remit USD 1,00,000 for his son’s education on 4th April, 2021. Accordingly, he has booked a forward
contract with his bank on 4th January @  73.8775. The bank covered its position in the market @ 73.7575
The exchange rates for dollar in the interbank market on 4th 7th and 14th April 2021 were:
4th April 7th April 14th April
Spot USD 1 =  73.2775/73.2975  73.1575/73.1975  73.1375/73.1775
Spot/ March April  73.3975/73.4275  73.2775/73.3275  73.2575/73.3075
April May  73.5275/73.5675  73.4075/73.4650  73.3875/73.4475
May June  73.7775/73.8250  73.6575/73.7275  73.6375/73.7075
June July  74.0700/74.1325  73.9575/74.0675  73.9500/74.0525
Exchange Margin 0.10% and interest on outlay of funds @ 12%. The remitter due to rescheduling of the semester,
has requested on 14th April, 2021 for extension of contract with due date on 14th June, 2018.
Rate must be rounded to 4 decimal place in multiple of 0.0025 and Assume 365days in a year
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: (i) 73.0850; (ii) 79250; (iii) 15000; (iv) 47; (v) 73.7775; (vi) 94297

Question No. 16B [Nov-2023-8M] [Nov-2016-8M-Modified]
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 13th 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 13th 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.
Rates rounded to 4 decimal in multiples of 0.0025
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 = 55,776 [47,250+8,500+26]; Cancellation rate 65.8940 rounded to 65.8950];
(ii) Charges for Execution = 55776+33,02,750 (Rate 66.0560 rounded to 66.0550)
(iii) Charges for Extension = 55776 and new rate 66.5575

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
Question No. 16.1 [SM-2023] [MTP-M23-8M] [N20-8M-Modified] [RTP-M18-Modified] [M15-9M-
Modified] [SSM-2016-Modified]
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 13th June were:
10th June 20th 13th 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 13th June for
extension of contract with due date on 10th August.
Rates rounded to 4 decimals in multiples of 0.0025
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 96 (v) 64.3143 rounded off to 64.3150 (vi) Total cost = 187060 186596

Question No. 16.2

On 1st August 2019, a bank entered into a forward purchase contract with an export customer for USD 25,000 due
on 1st November at an exchange rate of INR 72.6000 and covered its position in the market at INR 72.6500. The
customer remained silent on the due rate. On 16th 4th November, the bank cancelled the contract without further
notice as fifteen Three days had expired after the contract due date. The following exchange rates prevailed:
1st November Interbank TT rates USD 1 = INR 72.7500/7600
1 month forward INR 72.9500/9600
Merchant TT rates INR 72.6700/9000
th
16th 4 November Interbank TT rates INR 72.7000/7100
Merchant TT rates INR 72.6400/7800
Interest on outlay of funds is 12% p.a.
Explain the position of the bank in relation to the customer and the market on various dates, compute the swap
loss/gain, ignore margin and find out the charges payable by the customer on cancellation.
[CMA-Dec-2019-10M-Modified]
Ans: Exchange difference of 4,500 [Charged to Customer]; Swap Difference 4,750 [Not pass on to Customer; Gain to Bank] &
Interest of 13.56 2.71charged to customer
SQUARE OFF OF TRANSACTION ON EXCHANGE

Question No. 17A [SM-2023] [MTP-N19-8M] [MTP-M14-5M] [June-09-6M] [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

’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’’
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

LEADING AND LAGGING

Question No. 18A [SM-2023] [RTP-May-2021] [MTP-Nov-2019-8M] [May-2012-8M]
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 months. 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 months 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. 18.1 [RTP-May-2010]
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.

PARALLEL LOAN / BACK TO BACK LOAN

Question No. 19A [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.
NETTING OFF OF FOREIGN CURRENCY

Question No. 20A [RTP-Nov-2010]
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.
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. 20B [SM-2023] [Nov-2006-4M]

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-SM22] [CMA Compendium] [CMA-PTP-June-2015-8M] [CMA-PTP-Dec-2014-6+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. 21A
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/£)
[CMA-Dec-2002-8M]
Ans: (i) Decentralized management = $ 203,22,785; (ii)Centralized management = $101,87,649
Question No. 21B [RTP-N23] [RTP-Nov-2020] [SSM-2016] [RTP-Nov-2009]

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 (£) CHF 2.3295 - 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. 21.1 [RTP-Nov-2015] [RTP-May-2011] [May-2007-8M]
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-2008-9M] [CMA Compendium]
Ans: (i) (a) cash balance =  475,323; (b)  484,080; (ii) Immediate cash pooling is preferable.
EXPOSURE MANAGEMENT STRATEGIES MATRIX

Question No. 22A [RTP-Nov-2018]
Place the following strategies by different persons in the Exposure Management Strategies Matrix.
Strategy 1: Kuljeet a wholesaler of imported items imports toys from China to sell them in the domestic market to
retailers. Being a sole trader, he is always so much involved in the promotion of his trade in domestic market and
negotiation with foreign supplier that he never pays attention to hedge his payable in foreign currency and leaves
his position unhedged.
Strategy 2: Moni, is in the business of exporting and importing brasswares to USA and European countries. In
order to capture the market he invoices the customers in their home currency. Lavi enters into forward contracts to
sell the foreign exchange only if he expects some profit out of it other-wise he leaves his position open.
Strategy 3: TSC Ltd. is in the business of software development. The company has both receivables and payables
in foreign currency. The Treasury Manager of TSC Ltd. not only enters into forward contracts to hedge the exposure
but carries out cancellation and extension of forward contracts on regular basis to earn profit out of the same. As a
result management has started looking Treasury Department as Profit Centre.
Strategy 4: DNB Publishers Ltd. in addition to publishing books are also in the business of importing and exporting
of books. As a matter of policy the movement company invoices the customer or receives invoice from the supplier
immediately covers its position in the Forward or Future markets and hence never leave the exposure open even for
a single day

01 - Forex-Question Bank

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7th Edition

CA Final | CMA Final | CAP - III

CA. Nagendra Sah

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2. Stock Exchange ………………………………………………………...... 2.1 to 2.1

3. Time Value of Money (TVM) ….……………………………………….. 3.1 to 3.3

4. Mutual fund …….………………..……………………………………… 4.1 to 4.14

5. Derivatives Analysis and Valuation ………….………………………… 5.1 to 5.40

6. Portfolio Management ..………………………………………..……….. 6.1 to 6.48

7. Security Valuation …….……………………………………………….. 7.1 to 7.50

8. Interest Rate Risk Management (IRRM) .…….…………..……………. 8.1 to 8.16

10. Business Valuation [Not for CMA] ..…………………………………….. 10.1 to 10.14

12. Security Analysis ……………………..…………….…………………… 12.1 to 12.4

13. Advanced Capital Budgeting .………………………….………………… 13.1 to 13.36

16. Leasing Decision [Not for CA] …………………………………………. 16.1 to 16.14

17. Miscellaneous [Only for Cap-III] ………………………………………… 17.1 to 17.8

18. Tables ……………………………………………………………………. 18.1 to 18.12

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After going through the chapter student shall be able to understand

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BID/ASK, PREMIUM / DISCOUNT; SWAP POINT

British pound 1.5398 1.6385

Question No. 1D [SM-2023] [RTP-N22] [Nov-2016-5M]

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 TEST YOUR KNOWLEDGE

Question No. 1.2

IRPT AND PPPT

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Question No. 2C [SM-2023] [M15-Nepal-8M] [Part(i)-M10-4M] [N08-8M] [RTP-N09/M10/M13]

Question No. 2D [Nov-2000-8M] [RTP-N23]

 TEST YOUR KNOWLEDGE

Question No. 2.1 [Nov-2002-4M]

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Question No. 2.3

Question No. 2.4

Question No. 2.5

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FORWARD CONTRACT HEDGE

Question No. 3B [SM-2023] [RTP-Nov-2019] [Nov-2018-5M] [Nov.-2004-4 Marks]

Question No. 3C [SM-Old]

Question No. 3D [SM-2023] [May-2016-8M]

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Question No. 3F [SM-2023] [Dec-2021-8M] [RTP-Nov-2012] [May-2008-8 Marks]

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Question No. 3J [SM-2023] [Nov-2019-8M] [MTP-Nov-18-8M] [RTP-Nov-15/May-14] [Nov-2007-8M]

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 TEST YOUR KNOWLEDGE

Question No. 3.2 [SM-Old]

Question No. 3.4 [MTP-N23-10M] [July-2021-8M]

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Question No. 3.6 [SM-2023] [May-2015-Nepal-8M] [Nov-2009-12M]

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Question No. 3.9

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SETTLEMENT OF TRANSACTION AT DIFFERENT DATES

 TEST YOUR KNOWLEDGE

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Question No. 4.3 [SM-2023] [MTP-II-May-2022-8M] [RTP-Nov-2021] [MTP-Nov-2020-10M]

Spot Rate INR/ US$ (buying)  66.98

MONEY MARKET HEDGE AND FORWARD HEDGE

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