Professional Documents
Culture Documents
Q1
Rs 45 / $
= $
ii.
/ Re
45
= $ 0.022222 / Re
v. Rs 7.25 / FF
= FF
1
7.25
Q2
1
80
= DM
/ Re
= 0.0125 / Re
vi.
Rs 108 /
=
/ Re
= FF 0.1379310/Re
iii. Rs 25 / DM
Rs 80 /
= 0.009259 / Re
25
/ Re
= DM 0.04 / Re
vii.
/ Re
108
iv. Rs 35 / S $
= S$
1
35
/ Re
= S$ 0.028571/Re
Rs 0.44 /
1
0.44
/ Re
= 2.272727 / Re
1
1.106
/ can
ii.
0.61995 / $
=$
1
0.61995
iii. 0.70744 / $
=$
1
0.70744
iv
= $
DM 1.9875 / $
1
1.9875
/ DM
$
= $ 1.613033 /
= $ 0.904159 /can$
v. AUS $ 1.10782/$
=$
1
1.10782
/ AUS $
= $ 0.902674/AUS$
vi. 90.225 / $
=$
1
90.225
= $ 0.0110834 /
= $ 1.413547 /
= $ 0.503144 / DM
Q3
1
46.90
1
46.30
per $
iii.
Rs 63 / 65 per
65
63
v.
1
6.4210
6.1563
per FF
vii.
255 250
per Rouble
79.10 78.45
per Re
iv.
per Re
per $
1.6512 1.4236
= 0.605620 / 0.702445 per $
vi.
710 675
100
0.1104
100
0.1086
Q4
a.
Rs 42.50 per $
$ 1.0563 per
= 42.50 x 1.0563
= Rs 44.89275 per
b.
180.80 per $
0.3264 per $
Indirect quote in UK
i.e
=
= 180.80 x 0.3264
= 59.01312 per
c.
0.9033 per $
0.6437 per $
180.75 per
d.
= 180.75 x 0.6437 x
=180.80 x
Direct quote in UK =
x
/ 181.30 x
1
3.5250
= 0.6125 per $
0.6125 per $
DM 1.3275 per $
108 per $
3.5255
0.9033
= 128.804135 per
e.
, ,
= 0.6125 x 1.3275
= 0.461394 / DM
= 0.6125 x 108
= 0.005671 per
=
$
, ,
=
=
=
=
1
0.6125
$ 1.632653 per
1
1.3275
$ 0.753296 per DM
1
108
$ 0.009259 per
Contd:
x = 1.3275 x 0.6125
= DM 2.167347 per
= 1.3275
= DM 1.3275 per $
= 1.3275 x
1
108
= DM 0.0122917 per
, $ ,
Given
1
0.6125
108 x
176.326531
108
108 per $
f.
108 x
81.355932 per DM
1.3275
=
=
=
1
82.20
x 42.30 x 1.124 x
1
6.725
1
80.50
x 43.80 x 1.136 x
1
6.243
Q5
Rs 46.30 per $
Rs 46.95 per $
=
=
Premium on $
= 5.616 % p.a
;
Discount on Re
x 12
46.30 ; 46.95
46.95
x 12
Q6
.
x 12
3
46.95 ; 46.30
46.30
x 12
5.538 % p.a
Rs 50 per $
3 Month Forward if
a. Annual premium on $ is 20%
;
x 12 = 0.20
3
; 50
50
x 12 = 0.20
3
50 ;
x 12 = 0.20
F = 47.619
3 month forward rate Rs 47.619 per $
x12 = - 0.10
; 50
50
x 12 = 0.20
F = 52.5
Rs 52.5 per $
x 12 = - 0.10
F = Rs 48.75 per $
x 12 = - 0.10
50 ;
x 12 = - 0.10
50 F = - 0.025
F = Rs 50.25 / $
Q7
Given
Spot rate
$ 1.3078 per
0.8075 per
x 12 = 0.0375
1.3078 ;
x 12 = 0.0375
1.3078 ;
0.0375
4
1.3078 F
= 0.009375 F
F
= 1.295653
3 Month forward rate = $ 1.295653 per
b. Spot rate is
If 6 month forward rate is
i.
0.8075 per
0.8134 per
Premium or discount on
;
x 12
0.8134 ;0.8075
0.8075
x 100 x 2
is 1.4613% p.a
ii.
Premium or discount on
;
x 12
6
0.8075 ; 0.8134
0.8134
x 100 x 2
Q8
Given
Spot
1 Month Forward
2 month forward
3 Month Forward
6 Month Forward
Premium or discount on $
i.
1 month forward
47.50 ;47.30
47.30
x 100
x 100
2 month forward
47.75 ;47.30
47.30
x 100
3 month forward
47.90 ;47.30
47.30
x 100
6 month forward
48.40 ;47.30
47.30
x 100
Premium or discount on Re
i.
1 month forward
x 100
47.30 ;47.50
47.50
x 100
ii.
2 month forward
47.30 ;47.750
47.75
x 100
3 month forward
47.30 ;47.90
47.90
x 100
iv.
6 month forward
47.30 ;48.40
48.40
x 100
Premium or discount on $
1 month forward
x 100
47.20 ;47
47
1
ii.
iii.
47.40 ;47
47
x 100
3
iv.
x 100
47.60 ;47
47
x 100
47.90 ;47
47
x 100
Contd.
b.
i.
Premium or discount on Re
;
1 month forward
x 100
47 ;47.20
47.20
x 100
2 month forward
47 ;47.40
47.40
x 100
3 month forward
47 ;47.60
47.60
x 100
6 month forward
47 ;47.90
47.90
x 100
Q9
Spot Rate
Q10
Q11
Spot Rate
Rs 46.30 / 46.55 per $
One month forward rate if swap points are .15 / .11
46.30 /
46.55
. 15
.11
46.15
46.44
One month forward rate is Rs 46.15 / 46.44 per $
Spot Rate
DEM 1.5880 / 1.5890 per $
One month forward rate if swap points are .10 / .05c
1.5880 /
1.5890
.0010
.0005
1.5870
1.5885
One month forward rate is DEM 1.5870 / 1.5885 per $
Two month forward rate if swap points are .20 / .10c
1.5880 /
1.5890
.0020
.0010
1.5860
1.5880
Two month forward rate is DEM 1.5860 / 1.5880 per $
Three month forward rate if swap points are .30 / .15c
1.5880 /
1.5890
.0030
.0015
1.5860
1.5880
Three month forward rate is DEM 1.5850 / 1.5875 per $
Q12
Spot Rate
$ 0.5875 / 0.5885 per DG
One month forward rate if swap points are .12 / .18c
0.5875 /
0.5885
+
.0012
.0018
0.5887
0.5903
One month forward rate is $ 0.5887 / 0.5903 per DG
Two month forward rate if swap points are .15 / .25c
0.5875 /
0.5885
+
.0015
.0025
0.5890
0.5910
Two month forward rate is $ 0.5890 / 0.5910 per DG
Three month forward rate if swap points are .20 / .30c
0.5875 /
0.5885
+
.0020
.0030
0.5895
0.5915
Three month forward rate is DEM 0.5895 / 0.5915 per DG
Q13
1,00,000
1.1575
1,00,000
1.8530
, i.e 53,967
1,00,000
185
, i.e 540.541
Q14
Given
Spot
Spot
2 m forward
3 m forward
2 month forward
1.5955
3 month forward
1
x 3.7600
/ 1.5970 x 3.7570
Applicable rate is Ask rate ie Firm will buy riyals @ DEM 0.424827 per Riyal
If the firm wishes to buy Riyals with option over the third month, quote provided
by Bank will be DEM 0.424335 / 0.424827 per Riyal
10,000
Q15
Indian Rayon is importing machinery from the US . Thus Indian rayon has to pay $ to US
firm . Since exact date of delivery and payment is not known and payment is to be
made between second and third month, so Indian Rayon will take an option of over a
third month contract
Spot rate
1 month forward
( 45.45 0.75)
2 month forward
Rs 44.30 / 45.1025
(45.45 1.15)
3 Month Forward
(45.8525 0.35)
(45.8525 0.75)
(45.45 1.40)
(45.8525 0.95)
If firm wants to hedge in the Forward market by over a third month contract, bank will
give following quote
Rs 44.30 / 44.9025 USD
i.e Indian Rayon will book a forward contract to purchase $ at Rs 44.9025 per USD
Q16
An exporter in London expects to receive $ 2,50,000 between 3rd and 4th month. To
protect its proceeds exporter should Hedge by over a fourth month contract.
Bank will provide following over a 4th month quote
$ 1.8066 / 1.8105 per
Exporter will sell $ to bank @ $ 1.8066 per
Q17
An importer requested Bank to remit SGD$ 25,00,000 on 28 Jan 2005, However due to
bank strike Bank was able to remit payment on 4th Feb.
Since Importer has to buy SGD $, thus from cross rate relevant rate is Ask rate
Amount to be paid for purchasing 25,00,000 SGD $ if bank had remitted on 28th jan
2005.
On 28th jan 2005 importer could purchase SGD $ at
=
=
=
=
45.90 x 1.7850 x
1
3.1575
25.948219
+ 0.032435
25.980654
Amount actually paid for purchasing 25,00,000 SGD $ on 4th jan 2005.
On 4th 2005 importer could purchase SGD $ at
=
=
=
=
Q18
M/s JVG of London made arrangements with Bank to make payment of 4,00,00,000
on 1st july 2008, However Bank made payment on 24th July 2008
Since M/s JVG has to buy yen, so from Cross rate , relevant rate is ASK rate
Q19
240
= 0.002248
= 0.000003
0.002251
1
265
= 0.002026
= 0.000003
0.002029
Q20
Customer has entered into 3 Month forward contract for selling 10,000 Swiss Francs
@ Rs 27.25 / SF
However after 2 Months customer approached bank for cancellation of Forward
Selling contract. For cancellation customer will enter into forward purchase contract
of 10,000 Swiss francs with Bank @ 1 month forward rate applicable on date of
cancellation i.e customer will purchase Swiss francs @ Rs 27.52 / SF (ask rate)
On due date
Customer will sell SF at
Buy SF at
Loss to customer per SF
Rs 27.25
Rs 27.52
0.27
Q21
Bank has entered into forward contract for Purchasing 50,000 @ Rs 82.75 /
However on maturity customer approached bank for cancellation of Forward contract.
For cancellation Bank will enter into Sale contract of 50,000 with customer @ rate
applicable on date of maturity i.e Bank will sell 50,000 @ 83.15 /
On maturity
Bank will buy at
Rs 82.75
Bank will sell at
Rs 83.15
Gain to bank per
0.40
On Maturity bank will recover from customer 50,000 x 0.40 = Rs 20,000
Q22
Bank has entered into forward contract for Selling $ 1,45,000 @ Rs 46.90 / $
After Maturity customer approached bank for cancellation of Forward contract. For
cancellation, Bank will enter into Purchase contract of 1,45,000 $ with customer @
rate applicable on 21st March i.e Bank will purchase $ 1,45,000 @ 47.05 / $.
Since customer approached bank after Maturity, so any gain to customer due to
cancellation shall NOT be paid to customer. However any loss to customer due to
such cancellation shall be recovered from customer
On 21st March
Bank will Sell $ at
Rs 46.90
Bank will Buy $ at
Rs 47.05
Loss to bank (or gain to customer )per $
0.15
Total gain to customer which shall not be paid by bank to customer is 1,45,000 x 0.15
= Rs 21,750
th
Q23
Bank has entered into forward contract for Selling $90,000 @ Rs 46.34/ $ due on 15 March 08
th
customer did not approached the bank on/before/after date of Maturity ie 15 March 08.
th
Bank will itself, after 14 days from date of maturity i.e on 15 day from date of maturity cancel
the forward contract. For cancellation, Bank will enter into Purchase contract of 90,000 $ with
th
customer @ rate applicable on 30 March i.e Bank will purchase $ 90,000 @ 46.50 / $.
Since customer did not approached the bank on / before /after Maturity, so any gain to
customer due to cancellation shall NOT be paid to customer. However any loss to customer
due to such cancellation shall be recovered from customer
th
On 30 March
Bank will Sell $ at
Bank will Buy $ at
Rs 46.34
Rs 46.50
Loss to bank (or gain to customer )per $
0.16
Total gain to customer which shall not be paid by bank to customer is 90,000 x 0.16
= Rs 14,400
Q24
AR constructions Ltd.
Bank has entered into 3 month forward contract for Selling 4,00,000 @ Rs 78.65 /
th
customer did not approached the bank on/before/after date of Maturity ie 15 March 08.
th
Bank will itself, after 14 days from date of maturity i.e on 15 day from date of maturity cancel
the forward contract. For cancellation, Bank will enter into Purchase contract of 90,000 $ with
th
customer @ rate applicable on 30 March i.e Bank will purchase $ 90,000 @ 46.50 / $.
Since customer did not approached the bank on / before /after Maturity, so any gain to
customer due to cancellation shall NOT be paid to customer. However any loss to customer
due to such cancellation shall be recovered from customer
th
On 30 March
Bank will Sell $ at
Bank will Buy $ at
Rs 46.34
Rs 46.50
Loss to bank (or gain to customer )per $
0.16
Total gain to customer which shall not be paid by bank to customer is 90,000 x 0.16
= Rs 14,400
Q25
th
Customer booked a forward contract to buy 2,00,000 $ due on 5 March. Customer did not
th
approach the bank PQR ltd.for cancellation of forward contract. The bank will on 15 day after
th
maturity i.e on 20 March, suo-moto cancel the contract.
th
In effect on 20 march a reverse contract is made on behalf of customer by PQR bank i.e
th
th
customer will sell 2,00,000 $ on 20 march. Since customer will Sell $ on 20 march, relevant
rate is BID rate. Customer will sell $ @ Rs 46.18 / $
Statement of Net gain or loss on cancellation of forward contract
Rs
th
Amount payable by customer on purchase of 2,00,000 $ on 5 march
2,00,000 x 46.10
92,20,000
Amount to be recieved on selling 2,00,000 $ @ 46.18 / $
2,00,000 x 46.18
92,36,000
Net Profit to customer on cancellation
16,000
Since customer did not approached the bank for cancellation, so any profit on cancellation to
PQR will not be paid by bank. But any loss on cancellation to PQR Ltd. will be recovered by
Bank. So Rs gain of Rs 16,000 to customer will not be paid by bank
OR gain to customer is 2,00,000 (46.18 46.10)
2,00,000 x 0.08 = Rs 16,000
Q26
customer has entered into forward contract to sell Swiss frank to bank @ Rs 36.25 after 3
months. Customer approached bank after 2 months for cancellation on forward contract.
For cancellation customer will make reverse contract to buy swiss frank from bank on due date.
Since customer has to buy CHF, so relevant rate is ASK rate. Thus customer will book a 1 month
forward contract to buy Swiss frank from bank @ Rs 36.52 per swiss frank
Statement of net profit or loss to customer on cancellation of forward contract
Amount receivable by customer on original contract to sell CHF
1,00,000 x 36.25
Amount payable by customer on reverse contract to buy CHF
1,00,000 x 36.52
Net loss to customer
36,25,000
36,52,000
27,000
Customer has made a contract with bank to purchase 3,00,000 @ Rs 75.45 per due
th
on 15 dec
On due date customer approached bank for cancellation of forward contract. For cancellation
customer will make a reverse contract with bank to sell to bank at the rates applicable on due
date
Since for cancellation customer has to sell so relevant rate is BID rate
Inter bank bid rate on due date is Rs 75.35 per . Banks margin is 0.090%
So customer will sell to bank at 75.35
0.090
100
226,35,000
225,84,655.50
50,344.50
th
Customer made a forward contract to sell 2,50,000 to bank @ Rs 102.30 / due on 15 oct. On
due date customer approached Bank for cancellation of forward contract.
For cancellation customer will make a reverse contract to buy from bank at the spot rates
applicable on due date. Since customer has to buy , so relevant rate is ASK rate
Inter bank ASK rate on due date is Rs 103.20 and inter bank margin is 0.150%
So customer will buy from bank @ Rs 103.20 + 0.0015 x 103.20 = Rs 103.3548 /
Statement of Profit or loss on cancellation of forward contract
Q29
255,75,000
258,38,700
2,63,700
st
customer made a forward contract to sell $ 5,00,000 to bank @ Rs 35.30 per $ due on 31 oct.
th
On 30 sept (before due date) customer approached bank for cancellation of forward contract
For cancellation customer will make a reverse contract to buy $ from bank at 1 Month Forward
th
rate applicable on 30 sept. Since customer had to buy $ in reverse contract , so relevant rate is
ASK rate.
th
37.40
0.18
37.58
0.07516
37.65516
176,50,000
188,27,580
11,77,580
Q30
Customer made a forward contract to sell 2,00,000 to retail bank (which in turn will sell these
th
s to wholesale bank) @ Rs 85.7475 / due on 15 October 2007.
th
On 15 june customer approached bank to cancel forward contract. For cancellation customer
will make a reverse forward contract to buy at forward rate applicable for October in june
Since customer has to buy for cancellation, so relevant rate is Ask rate. Customer will book a
th
th
forward contract on 15 june to buy on 15 October at following rate
Inter bank October Ask rate
+ margin of retain banker
October forward rate
85.7350
0. 0650
85.8000
Q31
171,40,000
171,60,000
20,000
th
customer made a forward contract to sell $ 7,50,000 at Rs 46.70 / $ to bank due on 15 feb. On
th
15 Jan customer approached bank for extension of forward contract by one month.
th
On 15 jan following contracts will be made by customer with bank
th
1. A reverse contract to cancel original contract of selling $ on 15 feb. i.e customer will make
th
th
one month forward contract on 15 jan to purchase $ 7,50,000 on due date 15 feb. since
th
customer had to buy $ so relevant rate is ASK rate. Thus customer will buy $ on 15 feb @
Rs 46.71 / $
th
2. New two month forward contract to sell $ 7,50,000 due on 15 march. Since customer has to
th
sell $ , so relevant rate is BID rate. Customer will on 15 Jan book a 2 month forward contract
to sell $ at Rs 46.73 / $
Statement of profit or loss of customer on extension
Amount receivable from sale of 7,50,000 $ as per original contract
7,50,000 x 46.70
Amount payable for purchase of 7,50,000 $ as per reverse contract
to cancel original contract 7,50,000 x 46.71
loss to customer
350,25,000
350,32,500
7,500
Q41
Robinson shillings Pvt. Ltd. an Indian company purchased goods from US company for
$ 2,50,000, payable in 4 months. RS Ltd has to buy $,Quotes are
Rs 112,50,000
Since Rupee payment (outflow) is lower in Forward contract, son RS ltd will book a forward
contract today to purchase $ after 4 months.
Q42
Uk customer purchased machine from Japan for 20,00,000, payment to be made in 3 months. If
quotes are
and customer has to buy (and sell ), so relevant rate is BID rate.
= 105 x 1.6320
= 171.36
Customer will book a forward today to buy 20,00,000 after 3 months @ 171.36 per
Customer will pay
20,00,000
117.36
= 11,671.3352
= 115 x 1.6330
= 187.795
20,00,000
187.795
= 10,649.9108
Option to purchase at spot rate after 3 months is better option. Customer will save
(11,671.3352 10,649.9108) = 1,021.4244
Q43
An Indian company purchased goods having Invoice value of $ 13,750 to be paid in 3 months.
At todays spot rate of $ 0.0275 per Re, for $ 13,750 company has to pay Rs 5,00,000
Exchange rate is expected to decline in 3 months
Spot rate after 3 months is $ 0.0275 x 0.95 =
$ 0.026125 per Re
If company purchase $ 13,750 after 3 months at spot rate after 3 months of $ 0.026125 per Re.
company will pay
13,750
0.026125
= Rs 5,26,315.789
= Rs 5,03,663.004
2,50,000
0.0222
, Rs 112,61,261
0.0222
0.90
= $ 0.024667 per Re
If Indian company sells $ 2,50,000 at spot rate after 6 months, it will receive
2,50,000
Rs 101,34,998.175
0.024667
Thus loss to Indian company = 112,61,261 - 10134998 = Rs 11,26,263
This loss can be hedged if company book a forward contract today to sell 2,50,000 $ at
$ 0.0241 per Re
If forward contract is taken, company will receive
2,50,000
0.0241
Rs 103,73,444
Q45
An Indian company Exported goods for 100 lac . is not quoted against Re. If Quote is
, then
129.75 and
So,
41.79
$
= 41.79 x 129.75
= Re 0.32208 per
So according to todays spot rate company will receive 100 lac x 0.32208 = Rs 32,20,800
144 and
43
= 43 x 144
= Re 0.298611 per
If 100 lac are sold at spot rate after 6 months, company will receive 100 lac x 0.298611 =
Rs 29,86,110
So, loss to company if is sold at spot rate after 6 months (29,86,110 31,22,680) = Rs 1,36,570
This loss can be hedged if company book a forward contract today to sell in September
6 month forward contract is available at
So,
137.35 and
$
x
1
42.89
= 42.89 x 137.35
= Re 0.312268 per
If 100 lac are sold at forward rate after 6 months, company will receive 100 lac x 0.312268 =
Rs 31,22,680
So, loss to company if is sold at spot rate after 6 months (31,20,800 31,22,680) = Rs 98,120
If forward hedge is take , loss to company is reduced by (1,36,570 98,120) = Rs 38,450
b.
137.85 and
$
42.78
= 42.78 x 137.85
= Re 0.310337 per
If 100 lac are sold at spot rate after 6 months, company will receive 100 lac x 0.310337 =
Rs 31,03,370
If 100 lac are sold at forward rate after 6 months, company will receive 100 lac x 0.312268 =
Rs 31,22,680
Since Re amount received in forward contract is more than amount received on basis of spot rate
after 6 months, so it is justified to take forward cover .
Q46
Q47
1.72;1.71
1.71
x 100 = 0.585%
5.70
1.05
= FF 5.428571 per $
5.70
.95
= FF 6 per $
Excel exporters an Indian company has to receive $ 1,00,000 in 60 days. When consignment was
priced exchange rate was Rs 45.50 per $
1. Current spot rate Rs 45.60 per $
60 days forward rate quoted by bank Rs 45.20 per $
;
Forward Discount on $ =
=
60
x 365
45.20 ; 45.60
45.60
60
x 365 = - 0.0534
Discount on $ is 5.34%
2. Consignment is priced when rate was Rs 45.50 per $. Thus when consignment was priced
company expected to receive Rs 45,50,000
At forward rate of rs 45.20 per $,, company is expected to receive Rs 45,20,000
Thus operating loss to company (45,50,000 45,20,000) Rs 30,000
Q49
Indian company purchased goods from Japanese company for 108 lac
At current spot rate it is equal to Rs 30 lacs
Thus current spot rate is
108
30
= 3.6 per Re
108
3.24
= Rs 33.333 lac
Loss to Indian company if payment is made at spot rate after 6 months (33.33 30) = 3.333 lacs
This loss can be hedged by booking a forward contract today to buy @ 3.3 per Re
108
3.3
= Rs 32.727 lac
Loss to Indian company if forward cover is taken (32.727 30) = Rs 2.727 lac
Thus if forward cover is taken loss of company is reduced by 3.333 2.727 = 0.606 lac
Q50
3,50,000
7.834
= $ 44,677
If Forward hedge is not taken, US company can sell DM after 6 months at spot rate after 6
months
i.
If after 6 months $ gained 5%, spot rate after 6 months will be 7.5 x 1.05
= DM 7.875 per $
Company will receive
3,50,000
7.875
= $ 44,444
In this case profit to US company due to forward hedge is ( 44,677 44,444) = $ 233
ii.
If after 6 months $ lost 2%, spot rate after 6 months will be 7.5 x 0.98 =
= DM 7.35 per $
Company will receive
3,50,000
7.35
= $ 47,619
In this case loss to company due to forward hedge is (47,619 44,677) = $ 2942
iii.
If after 6 months $ remained stable, spot rate after 6 months is DM 7.5 per $
Company will receive
3,50,000
7.5
= Rs 46,667
In this case if forward hedge is taken, company will incur a loss of (46,667 44,677)
= $ 1990
Q51
PQR Ltd an Indian company purchased goods for 2,00,000 from UK firm, payable after 4
months. Since PQR Ltd has to purchase 2,50,000 , so relevant rate ASK rate
PQR has 2 options
1. Pay immediately without any interest charge
In this case company will borrow from bank @ 15% p.a and purchase for payment to UK
firm
Amount borrowed from Indian bank to purchase at
Spot rate of 78.60 per 2,00,000 x 78.60
Interest on amount borrowed @ 15% p.a for 4 months
157,20,000 x 0.15 x
4
12
Rs 157,20,000
Rs 7,86,000
Rs 165,06,000
nd
2,00,000
4
12
3,333
2,03,333
Rs 160,71,440
Amount of consignment
2,40,000
9,000
payable to vendor
Amount payable to purchase = 2,49,000 x ( 108.50 + 0.40)
2,49,000
Rs 271,16,100
b. Settle now at current spot rate and pay interest on overdraft for 3 months
In this case, CC Ltd will pay 2,40,000 to vendor immediately by borrowing from bank @
18% p.a
Amount borrowed from bank to purchase 2,40,000
2,40,000 x 108.50
Interest on amount borrowed
260,40,000 x 0.18 x 0.25
Amount payable to bank
2,60,40,000
11,71,800
272,11,800
st
Since re outflow is lower in 1 option, So company should pay to vendor after 3 months along
with interest of 15% p.a
Q53
30
$ 50,000
$
365
246.57
50,246.57
30
365
nd
22,65,000
16,754.79
22,81,754.79
Q54
US co. purchased goods worth 1,00,000 DM from a firm in Germany. German firm offered a
discount of 2%, if payment is to be made in 10 days
a. If payment is made in 10 days
US company will avail discount of 2% and amount payable to German firm is 1,00,000 x 0.98
= DM 98,000
US company will purchase 98,000 DM at spot rate of $ 0.55 / DM
US company will pay 98,000 x 0.55 = $ 53,900
b. If payment is made in 90 days
US company will book a forward contract today to purchase 1,00,000 DM @ $ 0.56 per DM
US co. will pay 1,00,000 x 0.56 = $ 56,000
c.
Q55
Alert Ltd is planning to import a machine from japan costing 3400 lac to be paid in 180 days
Alert Ltd has 2 options
1. To pay Japanese firm immediately by purchasing at spot rate today by borrowing from bank
in India @ 18% p.a with quarterly rests
Amount borrowed from bank in India to purchase at spot rate today
3400
340
x 100
Rs 1,000 lac
0.18 2
)
4
92.025
Rs 1,092.025 lac
2. To pay Japanese firm immediately by borrowing from Tokyo bank. Bank in Tokyo will
extend a loan of 3400 lac @ 2% p.a, if Indian bank gives LC for which Indian Bank charges
Commission of 2% p.a
Commission will be 1000 lacs x 0.02 x 0.5
10 lac
For paying commission Alert Ltd will take a loan of Rs 10 lac from Indian bank @ 18% p.a
with quarterly rests
2
Amount payable after 6 months to Indian Bank 10 lac (1 + 0.045) = Rs 10.92025
6
12
3434 lacs
Amount payable to Tokyo bank can be purchased at 180 days forward rate of 345 per Rs
100
Alert Ltd will pay
Total re outflow in 2
3434
nd
345
x 100
Rs 995.3623 lacs
Total cash outflow in 2 option is lower than cash outflow in option 1. Therefore, offer from
foreign branch should be accepted.
Q56
a.
US
240.85 / 242.46 per $
Japan 244 / 246 per $
Since 2 quotes are not overlapping each other, so arbitrage opportunity exist
If trader has 10,000 $
He will sell $ in Japan @ 244 / $, and receive
10,000 x 244
He will buy $ from US @ 242.46 per $
And will receive
France
India
24,40,000
242.46
(10,063.5156 10,000)
Arbitrage profit
b.
24,40,000
10,063.5156 $
63.5156 $
Since 2 quotes are not overlapping each other, so arbitrage opportunity exists
If trader has 10,000
He will sell in france @ Rs 140 per and receive
10,000 x 140
He will buy from Indian bank @ Rs 138 per and receive
14,00,000
10,144.93
138
144.93
Net profit
c.
UK
US
Rs 14,00,000
6322
=
=
$ 10,089.912
$ 89.912
1.3695
$ 7,301
0.7236
e.
Frankfurt
New York
CHF 10,091.12
1.3585
= $ 7361.059
Arbitrage profit
Q57
London
= 10,090.55
=
DM 90.55
a.
180.80
181.30
per DM
3.5255 3.5250
= 51.283505 / 51.432624 per DM
b.
10,000
3.5255
= 2,836.4771
5,12,835.06
51.2550
Q58
Arbitrage profit
New York
a.
DM 10,005.56159
DM 5.5619
London
c.
$ 15,474.404
1.5335
1
1.5285
10,123.914
Arbitrage Profit
123.914
London
-
SFr 23,750
Q59
a.
$ 15,487.4470
1.5335
1
10,132.448
1.5285
Arbitrage Profit
New York
France
London
132.448
$ 2.4110 /
Ff 3.997 / $
0.1088 / FF
b.
London
India
New York
$ 1,20,550
FF 4,81,838.35
52,424.01248
2424.01248
Rs 77.52 /
Rs 48.30 / $
$ 1.6231 /
Q60
Spot rate
ROI
62,306.5015
77.52
a. Forward Rate (
) =
1:
1:
1 : 0.08
120 x
120 x
1 : 0.12
1.02
1.03
118.834 per $
Rs 48,30,000
3
12
3
12
1,01,129.682 $
$ 1129.682
b. Swap rate =
=
=
c.
Premium or Discount on
100
3
) x 12
120 ; 118.834
118.834
3.9248 %
100
) x 12
Spot Rate
ROI
US
Germany
Forward Rate (
$ 0.6560 per DM
6.5%
4.5%
)
Spot Rate
ROI
India
US
1:
1 : 0.065
0.6560 x
0.6560 x
=
Q62
1:
1 : 0.045
1.01625
3
12
3
12
1.01125
$ 0.65924 per DM
Rs 45.50 / $
8%
2%
Forward Rate (
1:
1 : 0.08
45.50 x
45.50 x
Rs 46.85 per $
1 : 0.2
1.04
Premium or discount on $
100
3
46.85 ; 45.50
45.50
5.93%
OR
6
12
6
12
1.01
c.
1:
) x 12
100
) x 12
1:
1 :
100
1 :
Q63
a.
Spot Rate
ROI
India
UK
Forward Rate
Forward Rate (
5.94%
=
=
=
=
Rs 85 /
9%
?
Rs 87
100
) x 12
p
)
87
4
87
b.
1.04 ; 1.01
1.01
Let ROI in UK is
) x 12
12
)=
87 + 29 p
1:
1:
85 x
1:
85 x 1.03
87.55
87.55 ; 87
29
1.896552 %
Spot Rate
3 Month forward rate
ROI
London
US
=
=
=
=
$ 1.5654 /
$ 1.7500 /
2%
?
Forward Rate (
1:
1:
1:
1.7500
1.5654 x
1.7500 ( 1.005)
=
=
1.5654 x (
0.39135
49.41% p.a
1.75875
P
4
12
4
12
1 : 0.09
1 : 0.02
1.5654 + 0.39135p
0.19335
3
12
3
12
3
12
Q64
Spot rate
ROI
India
US
a.
b.
Rs 46.30 / $
10%
6%
Forward Rate (
1:
1:
46.30 x
46.30 x
Rs 47.199029 per $
1 : 0.6
1.05
1.03
Premium or Disc on $
;
c.
6
12
6
12
1 : 0.10
100
3
) x 12
47.199 ; 46.30
46.30
3.88%
100
) x 12
Premium or Disc on $
(interest rates)
1:
1 :
100
1 :
Q65
(
1.05 ; 1.03
1.03
3.883%
100
) x 12
Spot Rate
=
3 month forward =
$ 2.450 /
$ 2.650 /
ROI
4%
2%
i.
=
=
=
=
) x 12
(
(
100
3
) x 12
2.450 ; 2.650
2.650
3
=
- 30.1887 %
Annualised discount on $ =
30.188%
100
) x 12
ii.
Forward Rate (
1:
1:
1 : 0.04
2.450 x
2.450 x
1 : 0.2
1.01
3
12
3
12
1.005
$ 2.46218 per
Forward rate according to rate of Interest is different from forward rate quoted in market,
so forward rates are not in equilibrium.
Q66
$ interest rate
(annually
compounded
FF interest rate
(annually
compounded)
Forward FF / $
Forward disc on FF
a. Forward Rate (
6 Months
1 year
11.5%
12.25%
?
(**1)
19.5%
? (**6)
20%
? (**3)
? (**4)
? (**5)
- 6.3%
7.5200
? (**2)
) =
7.5200
7.5200 (1 + x )
(1+x)
X
3 Months
=
=
=
7.05 x
1:
7.52
1.125 - 1
0.125 or 12.5%
=
=
Forward Rate (
1:
1 : 0.20
8.46
8.46
c.
1:
) (3 months)
(**1)
;
7.05 ; 7.52
7.52
x 100
6.25%
(**2)
1:
1:
1.195
7.05 x
7.05 x
FF 7.173 / $
1.115
1.045543
1.027587
(**3)
d. Discount on FF
=
;
100
) x 12
7.05 ; 7.173
7.173
6.859%
100
) x 12
(**4)
months
;
e. Discount on FF
100
) x 12
7.05 ;
f.
-0.063
-0.0315 F
F
=
=
Forward Rate (
6
7.05 F
7.2792
) x 12
) (6 months)
7.2792
(1.093925)
X
Q67
Forward Rate (
1:
1:
46.50 x
46.50 x
1.1225
(1 + x )
0.1967
Or 19.67%
=
=
) /
1 : 0.06
1.03
1:
1.1225
1 : 0.12
1:
1:
1.093925
1:
7.05 x
1.0325106
(**5)
(
3
12
3
12
1:
(**6)
1:
1 : 0.14
/ 46.75 x
/ 46.75 x
1.035
1.015
1.0125
Rs 47.187192 / 47.788889 per $
1 : 0.05
3
12
3
12
Q68
) /
1:
1 : 0.10
46 x
46 x
1:
1 : 0.06
3
12
3
12
1:
1:
1 : 0.12
/ 48 x
1 : 0.04
3
12
3
12
1.025
1.03
/ 46 x
1.015
1.01
Rs 46.453201 / 48.950495 per $
3,50,000
Indian company will sell $ 3,44,827.586 at todays spot rate @ Rs 46/ $ and receive
3,44,827.586 x 46 = Rs 158,62068.956
Company will deposit Rs 158,62,068.956 @ 10% p.a for 3 months and receive
158,62,068.956 x 1.025 = Rs 162,58,620
1.015
= $ 3,44,827.586
Cash inflow in forward market hedge i.e Rs 162,75,000 is higher than cash inflow in money
market hedge i.e Rs 162,58,620. So forward market hedge is better.
Q69
Indian firm purchased machinery from US for $ 5,00,000, payment to be made in 4 months
Indian firm had to buy $, so relevant rate is ASK rate. Firm has 2 options
1. To take Forward market hedge
Firm will book a forward contract today to purchase $ 5,00,000 after 4 months @ Rs 46.45
per $
Firm will pay 5,00,000 x 46.45 =
Rs 232,25,000
2. To take Money market hedge
Forward Rate (
1:
1:
1 : 0.6
45.50 x
45.50 x
) /
1 : 0.04
1.02
(
4
12
4
12
1:
1:
1 : 0.09
/ 45.82 x
/ 45.82 x
1 : 0.03
1.03
1.0133
1.01
Rs 45.799342 / 46.727362 per $
5,00,000
For this deposit firm will buy $ 4,95,049.5049 @ Rs 45.82 /$ and pay
4,95,049.5049 x 45.82 = Rs 226,83,168.3145
1.01
= $ 4,95,049.5049
4
12
4
12
For buying $ firm will borrow Rs 226,83,168.3145 @ 9% for 4 months. After 4 months
firm will pay 226,83,168.3145 x 1.03 = Rs 233,63,663
Since cash outflow in forward market hedge i.e 232,25,000 is lower than cash outflow in
money market hedge i.e Rs 233,63,663, so Forward market hedge is better.
Q70
UK firm sold goods worth 2,50,000 to be received in 6 months. Since quotes are
, and firm
had to sell , so relevant rate is BID rate. Firm has two options
1. To take forward market hedge
Firm will take a forward contract today to sell 2,50,000 @ 1.2650 per . Firm will receive
2,50,000 x 1.2650 = 3,16,250
2. To take money market hedge
Forward Rate (
=1.2635 x
=
=
1:
) /
1:
1 : 0.04
1 : 0.035
1.2635 x
6
12
6
12
1.02
1:
1:
)
1 : 0.06
/ 1.2680 x
/ 1.2680 x
1.0175
1.266604 / 1.286738 per
2,50,000
1 : 0.03
1.03
1.015
Firm will sell 2,45,700.2457 @ todays spot rate i.e 1.2635 / and Receive
2,45,700.2457 x 1.2635 = 3,10,442.2604
Firm will deposit 3,10,442.2604 @ 4% p.a for 6 months and receive
3,10,442.2604 x 1.02 = 3,16,651.1056
1.0175
6
12
6
12
, 2,45,700.2457
inflow in forward market hedge i.e 3,16,250 is lower than inflow in money market
hedge i.e 3,16,651.1056, so money market hedge is better.
Q71
A US firm imported goods for 8,00,000 DM to be paid in 3 months. Since US firm has to buy DM
and quotes are
=0.1650 x
= 0.1650 x
=
1 : 0.2
1 : 0.06
1.005
1:
1:
3
12
3
12
) /
1:
1:
1 : 0.03
/ 0.1680 x
1 : 0.04
3
12
3
12
1.0075
/ 0.1680 x
1.015
1.01
$ 0.1633743 / 0.167584 per DM
8,00,000
To deposit DM firm will purchase 7,92,079.20792 DM @ $ 0.1680 / DM. Firm will pay
7,92,079.20792 x 0.1680 = $ 1,33,069.307
To buy DM firm will borrow $ 1,33,069.307 @ 3 % p.a for 3 months. After 3 months
firm will pay $ 1,33,069.307 x 1.0075 = $ 1,34,067.327
1.01
= 7,92,079.20792 DM
Since $ outflow in forward market hedge is lower than $ outflow in money market hedge,
so forward market hedge is better.
Q72
Indian firm imports goods from US firm worth $ 2,00,000, payment to be made in 3 months. Since
Quotes are
and Indian firm will buy $, so relevant rate is BID rate. Indian fir has 2 options
2,00,000
0.02193
= Rs 91,19,927
= .02217 x
= 0.02217 x
=
1:
1:
1 : 0.08
1 : 0.14
1.02
) /
3
12
3
12
1:
1:
1 : 0.09
/ 0.0222 x
/ 0.0222 x
1 : 0.12
1.0225
1.035
1.03
$ 0.021849 / 0.022038 per Re
2,00,000
3
12
3
12
1.02
= $ 1,96,078.4313 $
= Rs 88,44,313.54533
To buy $ firm will borrow Rs 88,44,313.54533 @ 14% p.a and pay after 3 months
88,44,313.54533 x 1.035 = Rs 91,53,864.519
Re outflow in forward market hedge is lower than Re outflow in money market hedge,
so forward market hedge is better.
Q73
P ltd purchased goods worth $ 51 lac from US, to be paid in 3 months. Pltd want to ensure that
cost of $ 51 lac should not exceed Rs 22 crore. Since quotes are
) /
1:
40 x
40 x
1 : 0.11
1.0325
3
12
3
12
1:
1:
1 : 0.16
/ 42 x
/ 42 x
1 : 0.08
3
12
3
12
1.04
1.0275
1.02
Rs 40.194647 / 42.823529 per $
1:
1 : 0.13
=
-
51,00,000
1.02
= $ 50,00,000
For deposit Pltd will buy $ 50,00,000 at spot rate of Rs 42 per $ and pay
50,00,000 x 42 = Rs 21,00,00,000
Pltd will borrow Rs 21,00,00,000 @ 16% p.a for 3 months. After 3 months Plt will pay
21,00,00,000 x 1.04 = Rs 21,84,00,000
Shoe company sold goods to German company for 50,000 DM to be received in 90 days.
a. Shoe company can hedge its Foreign exchange risk by
- Forward market hedge or
- Money market hedge or
- Currency option hedge or
- Currency future hedge
b. Spot rate
DM 1.71 per $
Forward rate
DM 1.70 per $
Since Forward rate is more than Spot rate, hence DM is at premium.
c.
According to interest rate parity high interest rates on currency are off set by forward discount
and low interest rates on currency are offset by forward premium
Premium on DM
=
=
x 100
1.71 ; 1.70
x 100 x
365
90
1.70
=
2.385%
Interest rate in Germany is lower than interest rate in US by 2.385 %
Q75
are , and UK firm has to sell $ , So relevant rate is ASK rate. F Ltd has 2 options
1,97,000
1,15,454.492
1.7063
= 1.7106 x
= 1.7106 x
1:
1:
1 : 0.06
1 : 0.125
1.015
) /
3
12
3
12
1:
1:
)
1 : 0.9
/ 1.7140 x
/ 1.7140 x
1 : 0.095
1.0225
1,97,000
= 1,92,665.036674 $
F ltd will Purchase at todays spot rate of $ 1.740 per and receive
1,92,665.036674
3
12
1.03125
1.02375
$ 1.683465 / 1.7119072 per
1.740
3
12
1.0225
= 1,12,406.6725
Since receipts are higher in forward hedge than receipts in money market, so forward
market hedge is better
F ltd imported goods worth $ 2,93,000 payable after 6 months. Quotes are , since Fltd
2,93,000
1.6967
= 1,72,688.159
= 1.7106 x
1 : 0.125
1:
1:
1 : 0.9
/ 1.7140 x
/ 1.7140 x
6
12
1 : 0.095
6
12
1.045
6
12
6
12
1 : 0.06
1.0625
1.0475
$ 1.65827 / 1.709909 per
) /
1:
1.03
= 1.7106 x
1:
2,93,000
2,84,466.0194 $
1.03
1,66,296.048
1,76,689.551
Since outflow is lower in forward market hedge, so forward market hedge is better.
Q76
2.5 x
2.5 x
6
12
6
12
1.075
1.06
N$ 2.535377 per
5,00,000
N$ 4,65,116.279
1.075
1 : 0.12
1:
1 : 0.15
1:
4,65,116.279
2.5
1,86,046.512
1,97,209.302
5,00,000
2.6
1,92,307.692
Thus if after 6 months gained by 4%, firm will receive 1,92,307.692 for selling 5,00,000
N$ if no hedge is taken, against 1,97,209.302 if money market hedge is taken. Thus if
money market hedge is taken firm will gain 1,97,209.302 - 1,92,307.692
= 4901.61
2. If after 6 months lost 2%
Spot rate after 6 months will be , 2.5 x 0.98 ,N$ 2.45 per
Company will buy 5,00,000 N$ for
5,00,000
2.45
2,04,081.632
Thus if after 6 months lost by 2%%, firm will receive 2,04,081.632 for selling 5,00,000 N$
if no hedge is taken, against 1,97,209.302 if money market hedge is taken. Thus if money
market hedge is taken firm will loose 1,97,209.302 - 2,04,081.632
= 6872.331
3. If after 6 months remained stable
Spot rate after 6 months will be N$ 2.5 per
Company will buy 5,00,000 N$ for
5,00,000
2.5
2,00,000
Thus if after 6 months remains firm will receive 2,00,000 for selling 5,00,000 N$ if no
hedge is taken, against 1,97,209.302 if money market hedge is taken. Thus if money
market hedge is taken firm will loose 1,97,209.302 - 2,00,000
= 2790.698
Q77
st
on 1 march 07 B Ltd, a US firm, purchased an equipment from foreign firm for LC 9,00,000 due
st
on 31 may 07
st
9,00,000
$ 90,000
10
9,00,000
9
$ 1,00,000
$ 10,000
$ 4,000
$ 96,000
$
12 %
4.8%
7.2%
3
12
3
12
1:0.048
Synthetic rate
(Bid)
10 x
10 x
1:0.072
1.012
1.018
LC
8%
3.2%
4.8%
LC 9.941061 / $
8,89,328.06 LC
$ 88,932.81
$ 90,533.60
$ 90,533.60
st
$ 1,12,500
$ 22,500
$ 9,000
$ 1,03,500
Cost Of LC 9,00,000 is least in option 2. So b ltd will Take hedge in money market for Foreign
exchange fluctuation
Q78
An Indian Co. has Receivable $ 2,00,000 in 3 months and payable 3,00,000 in 6 months
Incase on Receivable $ 2,00,000, Since company has to sell $ and quotes are
, Relevant rate
=
=
=
-
1:
1:
1 : 0.09
43.65 x
1 : 0.0425
3
12
3
12
1.0225
43.65 x
1.010625
Rs 44.162894 / $
2,00,000
$ 19,78,973.40
1.010625
Rs 863,82,189
Rs 883,25,788
Amount received In forward market hedge is more than amount received in Money market hedge,
so Forward market hedge is better
For payable 3,00,000, Company has to Buy and since quotes are
=
=
=
-
1:
1:
1 : 0.11
70.50 x
1 : 0.06
70.50 x
)
6
12
6
12
1.055
1.03
Rs 72.211165 /
Since Amount payable in forward market hedge is lower than amount payable in money market
hedge, so forward market hedge is better
Q79
1,20,000
i.
Forward market hedge
Book a forward contract today to sell $ after 1 month at (1.5050 0.0050)
$ 1.5000 /
1,78,500
Company will receive
1,19,000
1.5
ii.
1.5050 x
1
12
1
12
1.0075
1.006667
$ 1.5062454 /
1 : 0.08
1.5050 x
1:
1 : 0.09
1:
1,77,171
1.5050
$ 1,77,171
1,17,721
1,18,507
Since amount received in Forward market hedge is higher, so forward market hedge is
better
Thus receipts after 1 months
Net payment after 1 month
1,19,000
1,000
And Quotes are , so relevant rate is Bid rate. Company has 2 options
1,00,000
=
=
1:
2
12
2
12
1 : 0.06
1.5000 x
1.5000 x
1 : 0.12
1.01
1.02
$ 1.4852941 /
=
-
1:
4,95,050 $
3,30,033.00
3,36,634
Since amount payable in forward market hedge is lower than amount payable in money
market hedge, so forward market hedge is better
Thus amount payable after 2 months
3,31,125
Net payments after 2 months
2,31,125
Q80
An Indian exporter has to receive $ 1,000,000 after 3 months. Since company will sell $ and Quote
available is Rs/$ so relevant rate is Bid rate
Indian firm has 3 options
a. Borrow PV of Rupees and Sell $ 10,00,000 forward
-
Firm will book a forward contract today to sell 10,00,000 $ after 3 months @
(35.60 + 1.25) = Rs 36.85 / $
Firm will receive
Rs 360,85,000
Firm will borrow PV of Rs 360,85,000
360,85,000
i.e borrowings will be
Rs 349,06,892
3
1:0.135
12
$ 9,85,221.67$
12
c.
nd
option is highest , so 2
$ 9,37,500
Rs 333,75,000
nd
Q81
Spot rate
1:0.09
= 1.235 x
=
1.02375
3
12
3
12
/
/
3
12
3
12
1:0.105
1.24 x
1.24 x
1:0.08
1.02625
1.0225
1.02
can $1.236509 / 1.247598 per $
3
12
1,00,000 x 1.02625
Investor will Purchase US $ from Can $ 1,00,000 @ can $ 1.24/ $
1,00,000
Investor will get
1.24
Investor will deposit $ 80,645 @ 8% for 3 months. After
3 months investor will get 80,645 x 1.02
He will sell $ 82,258 at forward rate of Can $ 1.255 / $ and receive
82,258 x 1.255
can $ 1,02,625
$ 80,645
$ 82,258
Can $ 1,03,233.87
Spot rate
Rs 52.60/52.70 per
1:0.08
52.60 x
1:0.05
= 52.60 x
=
1.02
3
12
3
12
/
/
1:0.08
52.70 x
52.70 x
1:0.05
1.02
3
12
3
12
1.0125
1.0125
Rs 52.98963 / 53.09037 per
52.60 x
1:0.05
= 52.60 x
1.04
6
12
6
12
/
/
1:0.08
52.70 x
52.70 x
1:0.05
1.04
6
12
6
12
1.025
1.025
=
Rs 53.369756 / 53.47122 per
6 month forward rate
Rs 53.10 / 53.45 per
Since synthetic forward rate and 6 month forward rate are overlapping each other, so arbitrage
opportunity does not exist
Q83
Spot rate
0.5711 0.5714 / $
1:0.105
0.5711 x
0.5711 x
=
3 month forward rate
1 : 0.0820
1.02625
3
12
3
12
1:0.11
0.5714 x
0.5714 x
1.0205
0.574317 / 0.575601 per $
1 : 0.08
1.0275
3
12
3
12
1.02
Since synthetic forward rate and 3 month forward rate are overlapping each other, so arbitrage
opportunity does not exist
Q84
Spot rate
0.665 x
=
0.665 x
1 : 0.07
1.0225
3
12
3
12
1.0175
can $ 0.6682678 per DM
Can $ 0.670 / DM
Synthetic rate is less than forward rate. Investor will borrow can $ and deposit DM
-
Q85
265.0375 can $
John a foreign exchange dealer in Paris buys 1,00,000 , 90 days forward In Zurich
@ $ 1.9477 /
John will pay 1,00,000 x 1.9477
$ 1,94,770
He sells 1,00,000 90 day forward in Montreal @ $ 1.9512 per
John will receive 1,00,000 x 1.9512
$ 1,95,120
Net profit ( 1,95,120 1,94,770)
$ 350
Q86
10,00,000
1.5
= 6,66,667
a.
Indian Importer bought a machinery for $ 1,00,000 payable after 3 months. He has 3
options
Option 1
Currency option
Call option gives right to buy $ and Put option gives right to sell $. Since Importer has to
buy $, so he will buy call option, to buy $ 1,00,000 after 3 months @ Rs 49.20 / $
Statement of Cost of 1,00,000 $
Premium paid 1,00,000 x 0.40
On due date importer will buy 1,00,000 $ and pay
1,00,000 x 49.20
Total payment
40,000
49,20,000
49,60,000
Option 2
Forward market hedge
Importer will book a forward contract today to purchase $ 1,00,000 @ Rs 49.90 / $
Importer will pay
1,00,000 x 49.90
49,90,000
Option 3
No Hedging
He will buy 1,00,000 $ after 3 months @ spot rate after 3 months of Rs 51 / $
Amount payable 1,00,000 x 51
51,00,000
Since cash outflow in hedging through currency option is least, so currency option is
better
b.
Indian exporter exported goods for $ 2,00,000 to be received after 4 months. Exporter
has 3 options
Option 1
Currency option
Call option gives right to buy $ and put option gives right to sell $. Since exporter has to
sell $, so he will buy a put option to sell 2,00,000 $ after 3 months @ Rs 45.40 / $.
Statement of Net amount received
Amount of premium paid
2,00,000 x 0.30
On due date exporter will sell 2,00,000 $ @ 45.40 / $
Amount received
Rs
60,000
90,80,000
90,20,000
Option 2
Forward market hedge
Exporter will book a forward contract today to sell 2,00,000 $ after 4 months
@ Rs 44.90 / $
Amount received
2,00,000 x 44.90
89,80,000
Option 3
No hedging
Exporter will sell 2,00,000 $ at spot rate after 6 months @ Rs 44.95 / $
He will receive
2,00,000 x 44.95
89,90,000
Since cash inflows in hedging through currency option is highest, so currency option is
better
c.
PQR Ltd has to pay $ 2,50,000 in 4 months to a US firm. PQR has 3 options.
Option 1
Currency options
Call option gives right to buy Re and Put option gives Right to sell Re. Since PQR has to
buy $ ( i.e sell Re), So PQR will buy Put option and Buy $ after 4 months
@ $ 0.02198 / Re
Statement of Amount paid
Premium payable
$ 0.00015 / Re
2,50,000
PQR has to sell
, Rs 113,73,976
0.02198
Premium payable
113,73,976. x $ 0.00015 = $ 1706.0964
1706.0964
Amount paid for paying premium
Rs 76,782.016
0.02222
On due date he will buy 2,50,000 $ and pay
Rs 113,73,976
Total amount payable
Rs 114,50,758
Option 2
forward market hedge
PQR will book a forward contract today to buy 2,50,000 $ at $ 0.02183 / Re
2,50,000
He will pay
Rs 114,52,130.096
0.02183
Option 3
No hedging
PQR will buy 2,50,000 $ after 4 months at spot rate after 4 months
2,50,000
@ $ 0.02178 / Re
0.02178
Rs 114,78,421
Rs 72,871.113
Rs 66,25,441.7
Rs 65,52,570.6
Option 2
Forward Market Hedge
Company will book a forward contract today to sell $ 1,50,000 @ $ 0.2290 / Re
1,50,000
Company will receive
Rs 65,50,218.3
0.02290
Option 3
Company will sell 1,50,000 $ at spot rate after 3 months @ 0.023200 / Re
1,50,000
Company will receive
Rs 64,65,517.2
0.023200
Since amount receivable in currency option is highest, so currency option hedge is better.
Q88
a.
th
Sun Ltd, a UK co. has to receive $ 2,40,000 on 30 sept.Sun ltd is considering to hedge
this receipt through currency options
Call option gives right to buy and Put option gives right to sell . Since UK co has to sell
$ and buy , so UK co. will buy call option to sell to sell $ 2,40,000 @ $ 1.60 / at a
premium of 600 per contract
No. of contracts
Size of each contract is
30,000
2,40,000
1,50,000
1,50,000
5
30,000
1.60
3,000
1,50,000
1,47,000
$ 1.20 /
Since MP < Exercise Price, So call option will not be exercised.
Company will sell $ 2,40,000 in market
3,000
2,00,000
1,97,000
ii.
$ 1.60 /
Since MP = EP, Co. will be indifferent whether to exercise the call option or sell $
in market
Statement of amount to be received
Premium paid
5 contracts x 600
3,000
Amount received on due date
1,50,000
Net amount received
1,47,000
iii.
$ 2.00 /
Since MP > EP, Co. will exercise call option and sell $ 2,40,000 to writer
Statement of amount to be received
Premium paid
5 contracts x 600
2,40.000
Amount received on due date
1.60
Net amount received
Q89
1,50,000
1,47,000
Q90
3,000
$ 0.085
$ 0.120
$ 0.035
$ 0.110
.
$ 0.110
An Indian Exporter has to Receive $ 1,00,000 in 90 days. Indian company has 2 options
Option 1
No hedging
Company will sell $ 1,00,000 after 90 days, at spot rate after
90 days i.e @ Rs 46.50/$
Company will receive 1,00,000 x 46.50
Rs 46,50,000
Option 2
b.
d.