2 - Forex Questions M19 To J21
2 - Forex Questions M19 To J21
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Page 2.2 Forex Additional Q May19 to Jan21
Chapter - 2
(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]
Solution:
Class Note:
Disclaimer:
Suggested solution (by CMA) has used following formula in (ii) which is not correct:
Difference between Forward & Spot rate
Discount Rate = 𝐹𝑜𝑟𝑤𝑎𝑟𝑑 𝑟𝑎𝑡𝑒
But for calculating discount rate, following formula should have been used:
Difference between Forward & Spot rate
Discount Rate =
𝑆𝑝𝑜𝑡 𝑟𝑎𝑡𝑒
0.000226 12
= 0.015152 ×100× 3
= 5.97%
(ii)
Solution:
Solution:
Solution:
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 ₹/$: 73/73.42.
What is the foreign exchange exposure and risk of H Ltd?
Solution:
(i) Money market hedge:
For money market hedge Indian Firm shall borrow in US$ and then translate them to Indian
Rupee and shall make deposit in Indian Rupee.
For receipt of US$ 50,000 in 3 months (@ 1.5% interest) amount required to be borrowed
now (US$ 50,000 ÷ 1.015) = US$ 49,261.08
With spot rate of 72.65 the Rupee deposit will be = ₹ 35,78,817.46
Deposit amount will increase over 3 months (@2.25% interest) will be = ₹ 36,59,340.85
Forward market hedge
CROSS RATE
Question No. 6AA [RTP-Nov-2020-New/Old]
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
Solution: (i)
(ii)
Solution:
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
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Forex Additional Q May19 to Jan21 Page 2.21
Solution:
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.
Solution:
(i)
Solution: (i)
(iii)
(iv)
GEOGRAPHICAL ARBITRAGE
Question No. 10.4 [Nov-2020-New-4M]
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?
Solution:
(ii)
(ii)
Solution:
Export Customer.
Customer wants to sell US $ after three months.
Bank will purchase after 3 m from this customer.
1st Aug: Forward contract by bank to purchase on 1st November 25000 $ at 72.6000
1st Aug: Bank covers its position by forward sale agreement due on 1st Nov in inter-bank
market at 72.65
1st Nov: Customer default.
Bank sells in inter bank market at 72.6500, buys for this purpose in spot at 72.7600
1st Nov: Bank enters into 1 m forward sale with inter-bank market at 72.9500, due 16th
November.
Bank’s position is open until 16th November
16th November: Bank has to close its position by selling at 72.9500 and purchasing at
72.7100, while charged customer as if it purchased for 72.7800
Exchange Difference: 72.7800 - 72.6000 = 0.1800 per $ x 25000 = 4500, Charged to
Customer.
Swap Difference: 72.76-72.95 = 0.19 favorable, not passed on to customer
Gain to bank = 0.19 per $ x 25000$ = 4,750
Interest for outlay of funds for 15 days from 1st to 15th Nov 72.76-72.65 = 0.11 per $ per
day.
Interest = 0.11 x 12% x 15/365 x 25000 = 13.56 or 14, Charged to Customer.
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