KHETAN EDUCATION
FOREX
a) FOREIGN EXCHANGE EXPOSURE AND RISK MANAGEMENT
1. Bank A in India quotes `/ $ = 45.10/ 46.00
a. An Indian firm has imported goods from US and needs to pay $ 10, 00,000. What amount of `
would be required?
b. An American student has to pay ` 5, 00,000 for an Indian course. What amount of $ would be
required?
c. An Indian company has surplus funds of ` 40, 00,000 and wants to invest in US. It therefore
needs to convert Rupee into $. What amount of $ will it get?
2. Bank A, B & C provide the following quotes
Bank A `/ £ 91.40/ 91.70
Bank B `/ $ 42.50/ 43.10
Bank C $/ £ 2.1040/ 2.1070
Show the process of 3 way arbitrage which starts by selling ` 10000 to Bank A.
3. Given the following:
$/£ 1.3670/1.3708
SFr/DM 1.0030/1.0078
$/SFr 0.8790/0.8803
And if, DM/£ in the market are 1.5560/1.5576, find out if any arbitrage opportunity exist. If so,
how can $ 10000 available with you be used to generate risk-less profit?
4. Consider the following quotations by 3 banks.
A $/ £ 2.1050/ 2.1090
B €/ £ 1.8950/ 1.9010
C $/ € 1.0150/1.0180
Check for 3 way arbitrage and carry out the same using £ 10000. (Use Cross rates)
5. Based on six month forward rate of ` 42.60, the annualised forward discount on $ happens to be
10%. Find out the spot rate.
6. Based on three month forward rate of $ 2.1020/ £. The annualised forward premium on $ against
£ happens to be 12%. Find out the spot rate.
7. Given spot `/ $ = 42
6 month forward `/ $ = 42.80
a. Find out the annualised forward premium/ discount on $ against `
b. Find out the annualised forward premium/ discount on ` against $.
8. Based on the 3 month forward rate of ` 85.70/ £, the annualised forward premium on £ against `
Happens to be 9%.
Find out the annualised forward premium/ discount against £ based on 6 month forward rate of
` 89/ £.
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Prof. Archana Khetan
KHETAN EDUCATION
9. Based on the 3 month forward rate of ` 51.65/ €, the annualised forward premium on € against
` Happened to be 4%. Find out the 6 month forward rate (`/ €) given that the annualised discount
on ` against € based on 6 month forward rate is 7%.
10. An Indian firm has imported goods from Europe and has a payable of € 40000, 3 months from
now. To cover the payable, in the forward market, it approaches its banker. The banker informs
that `/ € rates are not directly available in India. So the bank decides to arrange a synthetic `/ €
rate with the help of the rates quoted in Mumbai and New York.
Mumbai Spot `/ $ 42.50/ 20
3 month swap points 80/ 90
New York Spot $/ € 1.1050/80
3 month swap points 120/ 110
Find out the synthetic 3 month forward rate `/ € rate that will be quoted to the Indian firm if the
bank requires an exchange margin of 0.3%.
11. An Indian company based at Mumbai needs short term funds of ` 50 million for a period of 3
months. The company collected the following information from its banker:
`/$ ` /£
Spot 48.50/ 55 74.05/ 10
3 month forward 45/ 50 85/ 90
3-month interest rates p.a.
` 9%
$ 4%
£ 6%
You are required to calculate the annualized effective cost of borrowing,
a. If the company borrows in USD and
• Covers the exchange rate risk through forward market
• Keeps the position open and the spot rate after 3 months turns out to be `/ $ 48.90/ 95.
b. If the company borrows in pounds and
• Covers the exchange rate risk through forward market
• Keeps the position open and spot rate after 3 months turns out to be `/ £ 74.75/ 80.
12. Spot rate is ` 52/ € and annualised forward premium on € against ` based on 6 month forward
happens to be 8%. If six month € interest rate is 5% p.a. Find out the ` interest rate.
13. Given 3 month forward rate ` 52/ €.
3 month interest rates
` 8% p.a.
€ 4% p.a.
Find out the spot rate.
14. Based on 3 month forward rate of ` 86/ £, the annualised forward discount on ` against £ happens
to be 5%. Find out the £ interest rate given that 3 month ` interest rate is 9% p.a.
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15. Given Spot rate ` 42.50/ $
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6 month forward rate ` 43.10/ $
Prof. Archana Khetan
KHETAN EDUCATION
6 month ` interest rate 10% p.a.
Find out the dollar interest rate as per IRP.
16. Given Spot rate ` 42/ $
3 month forward rate ` 42.7/ $
Three month interest rate p.a.
` 12%
$ 7%
Check for IRP and carry out covered Interest arbitrage using $1000 or ` 42000.
17. Given Spot (`/ $) = 46.2
3 month forward rate = 47.2
3 month ` interest rate = 8% p.a.
3 month $ interest rate =2%
Check for covered interest rate arbitrage opportunity for the Indian investor and the US
investor.
18. Spot rate `/ $ 42.20/ 42.55
6 month forward rate `/ $ 42.70/ 42.95
6 month interest rate (p.a.)
` 11%/ 12%
$ 6%/ 7%
Check for arbitrage from both the Indian and US investor’s point of view. Begin with 10000 units of
currency.
19. An Indian firm has $ 100000 payable and £ 200000 receivable 3 months from now.
Given spot `/ $ 43.50/ 43.80
3 month swap points 20/ 30
Spot $/ £ 2.1045/ 2.1065
3 month swap points 110/ 90
3 month interest rates p.a.
` 10%/ 11%
£ 7%/ 8%
$ 4%/ 5%
How should the firm hedge the payable and receivable – Forward Cover or Money market
Cover?
20. 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 month forward: 1.4245/ 1.4256
3 month 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
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b. Money market
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Prof. Archana Khetan
