Write short notes : a) Forward Contracts:
 A forward contact is a bilateral contract that obligates one party to buy and the other party to sell a specific quantity of an asset, at a set price, on a specific date in the future  Typically neither party to the contract pays anything to get into the contract  The parties may enter into the contract as a speculation on the future price  More often, a party seeks to enter into a forward contract to hedge a risk it already has. The forward contact is used to eliminate uncertainty about the future price of an asset it plans to buy or sell at a later date  The party to the forward contract that agrees to buy the financial or physical asset has a long forward position and is called as the long.  The party to the forward contract that agrees to sell or deliver the asset has a short forward position and is called the short.  Each party to a forward contract is exposed to default risk (or counterparty risk), the probability that the other party (the counterparty) will not be perform as promised

b) Currency Swap:
 In a currency swap one party makes payments denominated in one currency, while payments from the other party are made in a second currency  Typically, the notional amounts of the contract, expressed in both currencies at the exchange rate, are exchanged at contract initiation and returned at contract termination date in same amounts  As an example of what motivates a currency swap, consider that a US firm, Party A wishes to establish operations in Australia and wants to finance the costs in Australian dollars (AUD). The firm finds that issuing debt in AUD is relatively more expensive than issuing USD denominated debt, because they are relatively unknown in Australian financial markets. An alternative to issuing AUD denominated debt is to issue USD debt and enter into a USD/AUD currency swap. Through a swaps facilitator, the US firm finds an Australian firm, Party B that issues the same situation in reverse. They wish to issue AUD debt and swap into a USD exposure .

 Using a money market hedge.57 million Money market hedge: A money market hedge involves simultaneous borrowing and lending activities in two different currencies to lock in the dollar value of a future foreign currency cash flow. suppose the current spot rate for the Deutsche mark is DM 1= $0.57 million from its dollar investment  GE will use its DM receivable to pay back the DM loan amount of DM 21.  For example.40.2) Explain various ways of Forex risk Management? Forward market hedge:In a forward market hedge.74*1.40)  Invest $ 8. where as a company that is short a foreign currency will buy the currency forward.74 million for one year  It converts DM 21. thereby eliminating all currency risks on the sale. it simply shifts the risk from GE to Lufthansa . and the one year forward rate is DM 1 = $0.15 million = DM 21.7 million for one year  On 31st Dec GE receives 1.1*$8.  GE can effectively transform the currency denomination of its DM 25 million receivable from Deutsche marks to dollars.  For example. On Dec 31. Thus forward sale of DM 25 million for delivery in one year will yield GE $9.7 million = $9.15 = DM 25 million Risk Shifting : GE could have avoided its transaction exposure altogether if Lufthansa had allowed it to price the sale of turbine blades in dollars  Dollar invoicing does not eliminate risk. GE will receive payment of DM 25 million . a company that is long a foreign currency will sell the foreign currency forward.  GE will borrow DM 25/1. suppose Deutsche mark and US Dollars interest rates are 15% and 10% respectively.  Suppose that on Jan 1.7 million (at DM 1= $0. the German airline.74 million into $8.38. GE is awarded a contract to supply turbine blades to Lufthansa.

3) Given the following balance sheet data. calculate the ending balance sheet of the CTA       Solution :  Ending balance of retained earnings = Beginning retained earnings + Current period net income – Dividends paid = 175 + 50 – 25 = 200  CTA = Assets – Liabilities – Common Stock – Ending balance of retained earnings = 1000 – 600 – 150 – 200 = 50 Assets: 1000 Liabilities: 600 Common Stock: 150 Beginning retained earnings: 175 Current period net income: 50 Dividends paid: 25 .

37 .34.12 V2 (of short position after two months) = .06^(250/365) =1057. Suppose.06)^(1/12) = 515 – 504. Solution: V2 ( of long position after two months) = 515 – (507.34)/(1.4) Suppose a 3 month zero coupon bond has a no arbitrage price of $507.06)^(182/365)) = $34 Forward price = (1050 – 34) *1. Calculate the value of the long and short positions in the forward contract.12 5) Calculate the price of a 250 day forward contract on a 7% US Treasury bond with a spot price of $1050. and the risk free rate is still 6%. that after two months the spot prices on zero coupon bond of $515.88 = 10.07)/2 = $ 35 PVC = 35/ ((1.10. The annual risk free rate is 6% Solution:     Remember that US Treasury bonds make semiannual coupon payments so: C = ($1000 * 0. that has just paid a coupon and will make another coupon payment in 182 days.

Transport: Bill of Lading. Packing List. Insurance: Insurance Cover Note Regulatory: Certificate of origin .6) Write a short note on Letter Of Credit ? What are the various documents involved ? Solution: Commitment on part of a bank to place agreed amount as per the applicant (buyer) at the disposal of other (seller) party Tripartite agreement: – – Contract between buyer and seller Contract between buyer and Issuing bank Contract between issuing bank and beneficiary’s bank. Inspection certificate. Documents Under Letter Of Credit: Financial: Bill of Exchange Commercial: Invoice.

the central bank becomes a key participants in the foreign exchange market .arbitrage and speculation .A Manage Floating rate Systems is a hybrid of a fixed exchange rates and a flexible rates system .Flexible Exchange Rate System :.In a country with a managed floating exchange rate system .In Flexible Exchange Rate System the value of the currency is determined by the market . hedging . firms and other institutions seeking to buy and sell currency buying for purposes of transactions clearing . the Central Banks ready to exchange local currency and foreign currency at a pre-announced rate.e by the interactions of thousands of banks .In a Fixed ( Pegged) Exchange Rate System. (ii):. i. . (iii) :.Manage Floating rate Systems :.7) Kinds of Exchange Rates : Exchange rates are categorized into three main categories of Exchange rates .Fixed ( Pegged) Exchange Rate System :. These are :- (i):.

2007 Average for 2007 Historical Rate for Equity Unit USD USD/LC USD/LC USD/LC USD/LC Value 50 0.4762 0.4545 0.2006 December 31.5 0.8) Balance Sheet Cash Accounts receivable Inventory Current Assets Fixed Assets Accumulated Depreciation Net Fixed Assets Total Assets Accounts payable Current debt Long term debt Total liabilities Common Stock Retained earnings Total equity Total liability and equity 2006 (LC) 100 500 1000 1600 800 -100 700 2300 400 100 1300 1800 400 100 500 2300 2007 (LC) 100 650 1200 1950 1600 -700 900 2850 500 200 950 1650 400 800 1200 2850 Assumptions Retained Earnings on December 31.2006 Exchange rates December 31.5 .

9 431.4545 0.4545 0.1 1295.3 0.4545 0.5 2007 (USD) 45.4545 0.3 -37.3 .3 90.4 886.4545 0.4 545.3 727.4545 0.Conversion to Parent Exchange Rate System Balance Sheet Cash Accounts receivable Inventory Current Assets Fixed Assets Accumulated Depreciation Net Fixed Assets Total Assets Accounts payable Current debt Long term debt Total liabilities Common Stock Retained earnings Cumulative translation adjustment Total equity Total liability and equity 2007 (LC) 100 650 1200 1950 1600 -700 900 2850 500 200 950 1650 400 800 1200 2850 Rate 0.2 -318.4545 0.4545 0.0 227.5 295.4545 0.9 545.0 383.8 749.9 200.4 1295.4545 0.2 409.4545 0.4545 0.

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