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## 32. An Indian Bank obtains the following quotations:

Rs./\$ Spot : 45.30/45.45
6-month Swap : 105/130
The interest rates are as follows:
\$ : 6-month LIBOR – 1.25%
Rs. : 6-month – 7%
The bank can access rupee or dollar funds. If the bank needs funds immediately for six
months where should it borrow, if it does not want to have any foreign exchange exposure?
33. In December 2003, the following rates were being quoted:
SFr/\$ : 1.2459/1.2465 (Spot)
25/15 (3-month forward)
The three-month interest rates were:
\$ : 4.5/5.0
SFr : 1.75/2.00
34. You have obtained the following information from your banker.
Rs./Can\$ Spot : 34.50/34.53
Six-month forward : 34.75/34.90
Six-month rupee interest rate : 7%
What should be the interest rate on Can\$ to eliminate arbitraging possibilities?
35. If, in the previous problem, the bank has quoted the following interest rates, and the spot
and forward exchange rates remain the same, rework the interest rate on Can\$ to prevent
arbitrage.
Re. interest rates: 6% – 8% for 6-months.
36. You are given the following information by your banker.
Spot (Rs./Can \$) : 34.50/34.53
Rupee interest rate (6-months) : 6.00/7.00
Can \$ Interest rates (6-months) : 2.70/3.70
Determine the limits for six-month forward rates.
37. You are given the following information by your banker.
Spot : Rs./£ 45.60/45.75
: Rs./£ 82.90/82.96
6-month forward : Rs./£ 45.70/45.90
: Rs./£ 83.00/83.15
6-month \$ interest rates : 4.00/5.00
Compute the 6-month £ interest rates to prevent arbitrage.
38. You are given the following interest rates.
Re. \$
3-month 7% 4%
6-month 6.5% 3.5%
9-month 6% 3%
The 3-month forward rate is Rs.46/\$. Calculate the 3-month forward rate 6-months from
now.

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Part II

## 39. An Indian Company obtains the following quotes (Rs./\$)

Spot : 45.90/46.00
3-month forward : 46.00/46.15
6-month forward : 46.10/46.30
The company needs \$ funds for 6-months. If interest rates are as given below, determine
whether the company should borrow in \$ or Rupees.
3-month interest rates : Rs.–7% \$ – 4%
6-month interest rates : Rs.– 6.5% \$– 3.5%
Also, determine what should be the 3-month interest rate after 3-months to make the company
indifferent between three-month borrowing and six-month borrowing in the case of
a. Rupee borrowing, and
b. Dollar borrowing.
40. A Swiss exporter expects to receive \$1,000,000 after three months. The exporter has
collected the following information.
Spot (SFr/\$) : 1.2459/1.2465
Three-month forward (SFr/\$) : 1.2460/1.2470
Three-month LIBOR : SFr – 1.7%
\$ – 4%
If the exporter decides to use the money market or forward market to cover the exposure,
what will be the net position after three months in these markets?
41. A German exporter is expecting to receive \$1,000,000 after six months. He has collected
the following information.
Six-month interest rates : \$ –5.10/5.20
∈ – 4.80/4.90
Spot ( ∈ /\$) : 0.7940/0.8007
Six-month forward ( ∈ /\$) : 0.7956/0.8010
Compare the two alternatives of money market and forward market for covering the
exposure.
42. A UK importer will have to settle an invoice for ∈ 1,000,000 after three months.
He has collected the following information.
Three-month interest rates : ∈ – 4%
£ – 3.5%
Spot ( ∈ /£) : 1.4542/1.4560
Three-month forward ( ∈ /£) : 1.4550/1.4560
What would you recommend for covering the exposure: Forward market or money market?
43. An Indian Company is planning to invest \$100 million in USA. The return on investment is
expected to be 50%. The spot rate is Rs.45/\$. One year forward rate is Rs.46.00/\$. The
company can access rupee funds in India at 15%. An American Bank has offered to supply
\$100 million at a rate of Rs.44/\$ and swap the same amount at Rs.44/\$ after one year. The
bank will charge interest of 10% on the loan. Explain whether the company should accept
the bank’s offer. Assume that there is no restriction on accessing and repatriation of funds
in both dollars and rupees.
44. An Indian exporter has executed an order worth ∈ 30 million. Payment will be received
after 30 days on 01.05.2004. To execute the contract, the exporter had imported goods from
Japan and Germany, payments for which have to be made are given.
01.04.2004 – Yen 1800 million, S\$ 30 million
30.04.2004 – Yen 180 million, S\$ 3 million
The exporter is also expecting to realize the following payments.
01.04.2004 – Yen 360 million, S\$ 6 million
30.04.2004 – Yen 36 million, S\$ 0.6 million
The exporter has to settle a major payable in \$ expected to mature after 30 days.

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Explain how the exporter can generate funds in dollars after 30 days, without being exposed
to exchange risk. You are given the following exchange and interest rates.
Spot : Rs.60/ ∈ Rs.35/SFr Yen 120/ SFr Rs.22/S\$
1-month Forward : Rs.61/ ∈ Rs.36/ SFr Yen 115/ SFr Rs.21/S\$
1-month : Rupees – 12% SFr – 6% Yen – 2%
Euro – 7% interest S\$ – 3%
45. You are given the following quotes.
NKr/SFr HK\$/SFr
Spot 5.43/5.52 6.12/6.31
3-month forward 4/3 8/7
Interest rates prevailing are as follows:
Norweigian Kroners 12.5 - 13%
Hong Kong Dollars 13.5 - 14.0%
Banks add a spread of 0.5% to the above interest rates. Assuming you are a Norweigian
importer and have payables in Hong Kong \$ maturing after 90 days, what is the best
strategy for hedging the exposure?
46. A Newzealand exporter expects to receive \$1,000,000 in three months time. The exchange rates
prevailing are as follows:
Spot (NZ\$/\$) : 1.55/1.57
Forward (NZ\$/\$) : 1.53/1.55
3 months interest rates are as follows:
\$ (%) : 6.10/6.30
(NZ\$/\$) (%) : 5.15/5.30
What strategies can the Newzealand exporter adopt to hedge the exposure?
47. An Indian importer has to settle a bill for S\$ 100,000.
The exporter has given the Indian company two options.
i. Pay immediately without any interest charge.
ii. Pay after 3 months, with interest @6% p.a.
The importer’s bank charges 18% on overdrafts. If the exchange rates are as follows, what
should the company do?
Spot (Rs./ S\$) : 22.00/22.30
3-month (Rs./ S\$) : 22.90/23.20
48. A German subsidiary of a US multinational needs to raise funds to meet its working capital
requirements. Banks in Germany are prepared to lend at 8%. An additional service charge
of 0.5% is payable. The parent company is in a position to lend to the subsidiary. Rate of
interest applicable in USA is 7%. Meanwhile, the subsidiary has come to know that the rate
of interest in Switzerland is very low at only 3%. If the German Government charges a
withholding tax of 10% on interest in the case of funds borrowed from abroad, what is the
best alternative available?
49. A Japanese multinational is working out its cash management strategy for the month of
April, 2003. It has identified the following foreign exchange transactions which have to be
settled with minimum exposure.
01.04.03: The company will have to make payment of ∈ 500, 000 towards imports from
Germany. It will have to remit A\$ 1,000,000 to its subsidiary in Sydney, Australia. It will
receive ∈ 400, 000 from a customer in India. The company will export goods worth
SFr 20,000,000 payment for which will be received at the end of the month.

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Part II

30.04.03: The company will have to pay S\$ 1,000,000 towards imports earlier made from a
supplier in Singapore. The company will receive \$ 1,000,000 from a customer who has
imported its goods two months back.
You are given the following information.
Spot rates on 01.04.03 : Yen 128/ ∈ A\$ 1.71/ ∈ SFr 1.5/ ∈
S\$ 2.00/ ∈ \$ 1.25/ ∈
1-month forward rates (delivery) : Yen 125/ ∈ A\$ 1.72/ ∈ SFr 1.48/ ∈
S\$ 2.02/ ∈ \$ 1.27/ ∈
The one-month interest rates prevailing on 01.04.03 are as follows:
\$ – 6% Yen – 1% ∈ – 3.5%
SFr – 2% S\$ – 3% A\$ – 6%
Explain how the company can manage its foreign exchange exposure.
50. A multinational based in Zurich, Switzerland is planning to invest NZ \$ 1,000,000 in
Newzealand for a period of one year. The project is expected to yield post-tax returns of
20% in Germany. You are given the following information and asked to determine which of
the two would be the better alternatives.
a. Offer from a Swiss bank to swap NZ \$ for SFr at an exchange rate of NZ \$ 1.2/SFr.
Interest will be charged on the NZ \$ loan at a rate of LIBOR + 1%. The current rate
of LIBOR is 3.0%. At the end of the year, the bank will swap NZ \$ for SFr at the
same exchange rate.
b. Leave the exposure uncovered. The present spot rate is NZ \$ 1.1915/SFr. Six-month
LIBOR rates are as follows.
NZ \$ – 3% SFr – 2%
The LIBOR rates are expected to hold steady for the next one year.
Assume that the corporate’s credit rating allows it to access funds in both NZ \$ and SFr at
LIBOR + 0.5%.
51. An Indian exporter has bagged a contract to supply garments to a departmental store in UK.
The buyer has agreed to invoicing either in Sterlings or in Dollars. The Sterling price per
garment will be 4. The contract will be executed one month from now. It is expected that
from the time of shipment to negotiation of the LC, another month will lapse. If the
following are the relevant spot rates and interest rates and the exporters’ total costs are
Rs.200 per garment which currency would you choose for invoicing?
Interest rates : £ : 8% \$ : 5% Rs.:15%
Spot rate : Rs.59.00/£ Rs.35.50/\$
1-month forward rate : Rs.60.00/£ Rs.35.75/\$
2-month forward rate : Rs.61.00/£ Rs.36.00/\$

52. Assume that you are free to borrow/lend in any market and that active spot and forward
markets are accessible to all parties in Rupee against any currency.
The market rates are as under:
Rs./S\$ spot 24.8750 25.1250
3-m forward 25.6195 25.9805
3-m interest rates Rs. 17.50% 18.50%
S\$ 5.75% 6.25%
Verify whether an opportunity for covered interest arbitrage exists.

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53. Interest rates for three months in US and Canada are as follows:
Borrow Invest
US\$ 4.5% 4%

## Can\$/\$ spot 1.3119 1.3125

3-m forward 1.3129 1.3135
Advise the currency in which borrowing and lending for 3-months needs to be done for a
US Company.
54. A Bank agreed at the request of an exporter for a 2-m forward contract based on the
following rates:
Rs./\$ Spot 45.30/35
1-m forward 20/28
2-m forward 35/40
The exporter requested for the cancelation of the forward contract at the end of one month
and delivered US\$ 1,000,000. If the forward rates are the unbiased estimates of spot rates
compute the cash flow to the exporter.
55. A US investor chose to invest in sensex for a period of one year. The relevant information
is given below:
Size of investment (\$) 10,00,000
Spot rate 1 year ago 45.30/50
Spot rate now 45.80/90
Sensex 1 year ago 5333
Sensex now 6220
Inflation in US 2%
Inflation in India 4%
b. Compute the real depreciation/appreciation of rupee.
c. What should be the exchange rate if relative purchasing power parity holds good?
d. What will be the real return to an Indian investor in sensex?
56. The current market quotes are as under:
Rs./Euro Spot 49.50/65 Rs. interest rate Euro Interest Rate
1-m forward 49.20/40 1-month 9.00% 9.50% 3.50% 3.75%
2-m forward 49.00/25 2-month 9.75% 10.25% 4.00% 4.25%
Verify whether there is any scope for covered interest arbitrage. What should be the amount
of money to be borrowed to make risk-free gains of Euro 25,000 if there is scope for
arbitrage.
57. Consider the following information:
Rs./\$ one year ago : 39.50
Rs./\$ Spot now : 44.50
Inflation in India in the past one year : 4%
Inflation in the US for the past one year : 2%
Calculate:
a. The real appreciation/depreciation of the Rupee.
b. The nominal appreciation/depreciation of the dollar.

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Part II

## 58. Consider the following market quotations:

Exchange rates
Rs./Euro Spot 43.16/20
Rs./£ 1-m forward 70.40/50
Euro/£ 1-m forward 1.5565/75
Interest rates
Rs. (%) Euro (%)
1-month 11.00/11.50 3.00/3.25
a. What are the boundaries for one month forward Rs./Euro if there should not be any
scope for covered interest arbitrage?
b. If the one month forward Rs./Euro rate is 43.56/66, is there any scope for triangular
currency arbitrage in the forward rates?
59. Epsi Ltd. an Indian company requires Rs.10 million for six months. Epsi Ltd. has the option
of borrowing either in rupees or in US dollars. Epsi Ltd. has obtained the following
information from its banker:
Rs./\$ exchange rate
Spot 43.5700/5750
3-m swap 3900/4000
6-m swap 7000/7100
Interest rates
Rupee
3-months 11.00%
6-months 12.00%
US dollar
3-months 6.50%
6-months 7.00%
You are required to answer the following:
a. In which currency should Epsi Ltd. borrow?
b. What should be the 3-month interest rate 3-months hence on the currency borrowed
as per your answer to part (a) so that Epsi Ltd. is indifferent between borrowing for
6-months and borrowing for 3-months and rolling it over for another three months?
60. An American based FII is looking to invest US\$ 10 million in an emerging market. After a
careful analysis of future prospects, India and Malaysia are shortlisted. For the next year,
which is also the holding period for the FII, expected rates of return are 20 percent and 16
percent in Indian and Malaysian markets respectively. Withholding tax rates applicable on
the returns earned are 20 percent in India and 10 percent in Malaysia. Other information
available with the FII includes
Exchange rates:
Rs./\$ spot 43.50/43.60
M\$/\$ spot 3.80/3.82
Expected inflation for the next year:
India 4.0%
Malaysia 6.0%
US 2.0%
Assuming that the PPP holds good, where should the FII invest?

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61. Bharat Leathers and Piaco manufacture leather products and are based in India and Italy
respectively. Both these firms export major share of their output to the USA. Invoicing
currency for both the firms is US\$.
Exchange rates
Inflation rates during the last year
Current spot Spot one year ago
Rs./\$ : 44.00 Rs./\$ : 42.00 India : 5%
Lit/\$ : 2140.00 Lit/\$ : 2050.00 Italy : 3%
USA : 1.5%
a. Compute the nominal depreciations of rupee and Lira against the US\$ over the last
one year.
b. Compute the real depreciations of rupee and Lira against the US\$ over the last one year.
c. Comment on the export competitiveness of Bharat Leathers vs Piaco.
62. Sunil Bansal, a computer engineer in Stockholm decides to remit 1 million of Swedish
kroners by SWIFT to his father Ajay Bansal on June 30, 2003 to purchase a flat in Kolkata.
A foreign bank in Kolkata offered a rate of Rs.5.90/SKr to Ajay Bansal. However, Ajay
Bansal requested his banker (a private sector bank) to get a better rate. The branch manager
contacted his dealings office at Mumbai for the rate. The dealer in Mumbai has the option
to cover the transaction through Bahrain or Singapore. The spot exchange rates at Mumbai,
Bahrain and Singapore markets on June 30, 2003 are given below:
Mumbai : Rs./US \$ : 47.20/22
Rs./£ : 75.95/97
Bahrain : SKr/£ : 12.7532/39
Singapore : SKr/\$ : 7.9652/62
You are required to determine, which market dealer should opt to cover the position.
Assume that an exchange margin of 0.005 paise is to be loaded in the rate.
Calculate the gain or loss to the customer, if he relies on the rate quoted by his banker.
Show your working nearest to the rupee.
63. An importer in UK has a payable of Euro 500,000 after 3 months. He has collected the
following information from his banker.
Euro/£ spot : 1.4200/1.4210
3 months forward : 1.4245/1.4256
3 months interest rates (p.a.)
Euro: 2.60% – 2.80%
£: 3.00% – 3.20%
Which of the following would you recommend for covering the exposure through?
a. Forward market
b. Money market.
64. On April 01, 2003 Swastik Industries, a leading steel importer from Mumbai obtained a
forward contract from Citibank Mumbai to buy US \$1million for settling their
payable to the supplier in Germany on May 31, 2003. The US Dollars were quoted in the
local interbank market as under:
April 01, 03 Rs./\$ Spot 47.19/20
1-month forward 9/10 paise
2-months forward 19/20 paise
On May 01, 2003 the supplier informs the importer that the consignment can be shipped and
delivered in June 2003. Hence the importer requested Citibank Mumbai to extend the contract
to June 30, 2003. The US Dollars were quoted in the local interbank market as under:
May 01, 2003 Rs./\$ Spot 47.02/03
1-month forward 7/8 paise
2-months forward 13/14 paise

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Part II

Citibank Mumbai quoted the exchange rates by loading a margin of 0.20%. The bank
further agreed to offer a better rate by 4 paise while quoting the rates to the importer.
You are required to calculate the
a. Extension charges, and
b. Net cash outflow of the company as on June 30, 2003.
65. A multinational company in Germany has surplus funds of Euro 2 million for three months.
The treasury manager wants to toy with the idea of investing funds in currencies other than
that of the home currency. He has collected the following information on the exchange rates
and interest rates:
\$/Euro spot 1.1410/12
3-month forward 20/19
£/\$ spot 0.6217/19
3-month forward 13/14
3-months interest rates (p.a.)
\$ : 2.6%/2.8%
£ : 3.00%/3.6%
Euro : 3.2%/3.4%
You are required to determine, in which market the MNC should invest to have more
returns, without exposing the investment to exchange risk.
66. The following rates were prevailing on June 30, 2003.
Spot Rs./\$ 47.40/45
\$/Euro 1.1410/1.1415
Rs./Euro 53.85/90
You are required to:
a. Verify whether there is any scope for three point arbitrage.
b. Calculate the arbitrage profit if you have Rs.1 million.
c. Find out the limits of Rs./Euro exchange rates to ensure no scope of arbitrage.
67. The following information is given by your banker
Spot Rs./ US \$ : 47.80/82
Rs./£ : 77.45/47
Forward 6 months Rs./ US \$ : 48.53/55
Rs./£ : 78.07/09
6 months \$ interest rates 2.40%/2.60% p.a.
You are required to determine the 6 months £ interest rates which would prevent arbitrage.
68. Overseas Marine Products Ltd. an exporter of seafoods in Mumbai has submitted a 60 days
bill for Euro 200,000 drawn under an irrevocable LC for negotiation. The company asked
its banker to retain 50% of the bill amount under EEFC (Exchange Earners Foreign
Currency) account.
The rates for US dollars in the interbank market are quoted as under:
Rs./US \$ Spot : 47.80/81
1 month forward : 10/11 paise
2 months forward : 21/22 paise
3 months forward : 32/33 paise

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