CHAPTERWISE TEST - 2

FOREX & INTERNATIONAL FINANCIAL MANAGMENT

Time Allowed Maximum Marks
3 hours 100 Marks

Note: (a) Question 1 is Compulsory and

(b) Attempt 4 out of remaining 5 Questions.

Questions – 01
The following two way quotes appear in the foreign Exchange Market
Spot Three Months’ Forward
₹ / US $ ₹ 66/66.25 67/67.50
(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?
(8 Marks)

(b) G Ltd., an Indian Company has a payable of US $1,20,000 due in 3

months. The company wishes to cover the risk through the best of the
following alternatives:
(i) Forward Contract
(ii) Money market and
(iii) Options.

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The following information is available with the company:
Exchange Rate: Spot: ₹/ $ 68.25 / 68.32
3-months Forward: ₹/$ 68.85 / 69
Interest Rates (%) p.a. with annual rests:
US 6.5 / 7 (Deposit/Borrow)
India 15/16 (Deposit/Borrow)
Call option on $ with strike price of ₹ 69 is available at a premium of ₹
0.10/$.
Put option on $ with a strike price of ₹ 69 is available at a premium of ₹
0.05/$.
The Accounts Department of the company forecasts the future spot rate
after 3 months to be as follows:
Spot Rate after 3 months Probability
(₹/$)
68.40 0.10
69.00 0.60
69.60 0.30

You are required to advise G Ltd. the best alternative among the three with
supporting calculations and relevant figures.
(8 Marks)
(c) Write difference between Purchasing power parity and interest rate
parity.
(4 Marks)
Question – 02
(a) The following information is given:
Spot rate for 1 US Dollar ₹ 64.0123
180 days' forward rate for 1 USD ₹ 64.9120
Annualized interest rate for 6 months-Rupee 12%
Annualized interest rate for 6 months - US 8%
Dollar

Does any arbitrage opportunity exist? Discuss the sequence of activities for
gain using 1000 units of currency and compute the gains, if any.
(8 Marks)
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(b) XYZ Ltd., a company based in India, manufactures very high quality
modem furniture and sells to a small number of retail outlets in India and
Nepal. It is facing tough competition. Recent studies on marketability of
products have clearly indicated that the customers are now more
interested in variety and choice rather than exclusivity and exceptional
quality. Since the cost of quality wood in India is very high, the company is
reviewing the proposal for import of woods in bulk from Nepalese supplier.
The estimate of net Indian (₹) and Nepalese Currency (NC) cash flows in
Nominal terms for this proposal is shown below:
Year Net Cash Flow (in millions)
0 1 2 3
NC -25.000 2.600 3.800 4.100
Indian (₹) 0 2.869 4.200 4.600

The following information is relevant:

(i) XYZ Ltd. evaluates all investments by using a discount rate of 9% p.a.
All Nepalese customers are invoiced in NC. NC cash flows are
converted to Indian (₹) at the forward rate and discounted at the
Indian rate.
(ii) Inflation rates in Nepal and India are expected to be 9% and 8% p.a.
respectively. The current exchange rate is ₹ 1= NC 1.6
Assuming that you are the finance manager of XYZ Ltd., calculate the net
present value (NPV) and modified internal rate of return (MIRR) of the
proposal.
You may use following values with respect to discount factor for ₹ 1 @9%.
Present Value Future Value
Year 1 0.917 1.188
Year 2 0.842 1.090
Year 3 0.772 1

(8 Marks)
(c) Method for Hedging transaction Exposure.
(4 Marks)

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Question – 03
(a) X Ltd. has imported good from USA worth US $ 10 million and it
requires 90 days to make the payment. The USA supplier has offered a 60
days interest free credit period and for additional credit for 30 days
interest is to be charged at 8% per annum. (Consider 360 days p.a.)
The banker of X Ltd. Offers a 30 days loan at 10% per annum and its quotes
for foreign exchange are as follows:
Spot US $ ₹ 64.50
60 days forward rate for 1 US $ ₹ 65.10
90 day forward rate for 1 US $ ₹ 65.50

You are required to evaluate the following option:

(i) Pay the USA supplier’s in 60 days or
(ii) Avail the supplier’s offer of 90 days’ credit. Advise X Ltd. accordingly.

(8 Marks)
(b) Followings are the spot exchange rates quoted at three different
forex markets:
USD/INR 59.25/59.35 in Mumbai
GBP/INR 102.50/103.00 in London
GBP/USD 1.70/1.72 in New York
The arbitrageur has USD 1,00,00,000. Assuming that bank wishes to retain
an exchange margin of 0.125%, explain Whether there is any arbitrage gain
possible from the quoted spot exchange rates.
(8 Marks)
(c) Write short note on Economic Exposure.
(4 Marks)

Question – 04
(a) You, a foreign exchange dealer of your bank, are informed that your
bank has sold a T.T. on Copenhagen for Danish Kroner 10,00,000 at the rate
of Danish Kroner 1 = ₹ 6.5150. You are required to cover the transaction
either in London or New York market. The rates on that date are as under:

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 Mumbai – London ₹ 74.3000 ₹ 74.3200
Mumbai – New York ₹ 49.2500 ₹ 49.2625
London – Copenhagen DKK 11.4200 DKK 11.4350
New York – Copenhagen DKK 07.5670 DKK 07.5840

In which market will you cover the transaction, London or New York, and
what will be the exchange profit or loss on the transaction? Ignore
brokerages.
(8 Marks)
(b) EFD Ltd. is an export business house. The company prepares invoice
in customers' currency. Its debtors of US$. 10,000,000 is due on April 1,
2015.
Market information as at January 1, 2015 is:
Exchange rates US$/INR Currency Futures US$/INR
Spot 0.016667 Contract size: ₹ 24,816,975
1-month forward 0.016529 1-month 0.016519
3-months forward 0.016129 3-month 0.016118

Initial Margin Interest rates in India

1-Month ₹ 17,500 6.5%
3-Months ₹ 22,500 7%
On April 1, 2015 the spot rate US$/INR is 0.016136 and currency future
rate is 0.016134.
Which of the following methods would be most advantageous to EFD Ltd?
(i) Using forward contract
(ii) Using currency futures
(iii) Not hedging the currency risk
(8 Marks)
(c) The spot quotation placed by a bank in New York is $0.6650 -
0.6662/C$. On the same day a bank in Toronto made the spot quotation
C$1.5030-1.5040/$. Is there any arbitrage opportunity?
(4 Marks)

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Question – 05
(a) NP and Co. has imported goods for US $ 7,00,000. The amount is
payable after three months. The company has also exported goods for US $
4,50,000 and this amount is receivable in two months. For receivable
amount a forward contract is already taken at ₹ 48.90.
The market rates for Rupee and Dollar are as under:
Spot ₹ 48.50/70
Two months 25/30 points
Three months 40/45 points
The company wants to cover the risk and it has two options as under :
(A) To cover payables in the forward market and
(B) To lag the receivables by one month and cover the risk only for the
net amount. No interest for delaying the receivables is earned.
Evaluate both the options if the cost of Rupee Funds is 12%. Which
option is preferable?
(8 Marks)

(b) A dealer in foreign exchange has the following position in Swiss Francs
on 31st January, 2018 ;
(Swiss Francs)
Balance in the Nostro A/c Credit 1,00,000
Opening Position Overbought 50,000
Purchased a bill on Zurich 70,000
Sold forward TT 49,000
Forward purchase contract cancelled 41,000
Remitted by TT 75,000
Draft on Zurich cancelled 40,000
Examine what steps would the dealer take, if he is required to maintain a
credit balance of Swiss Francs 30,000 in the Nostro A/c and keep as
overbought position on Swiss Francs 10,000 ?

(8 Marks)

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(c) You are told that the spot rate is £/$ 1.8313.
The expected inflation rates in the UK and the US for the next three
years are given below.
Year UK Inflation (%) US Inflation (%)
1 2.10 1.60
2 2.15 1.65
3 2.25 1.70

Calculate the expected £/$ spot rate after three years.

(4 Marks)

Question – 06
(a) On 10th July, an importer entered into a forward contract with bank
for US $ 50,000 due on 10th September at an exchange rate of ₹66.8400.
The bank covered its position in the interbank market at ₹ 66.6800.
How the bank would react if the customer requests on 13th September:
(i) To cancel the contract?
(ii) To execute the contract?
(iii) To extend the contract with due date to fall on 10th November?
The exchange rates for US$ in the interbank market were as below:
10th September 13th September
Spot US$1=66.1500/1700 65.9600/9900
Spot/September 66.2800/3200 66.1200/1800
Spot/October 66.4100/4300 66.2500/3300
Spot/November 66.5600/6100 66.4000/4900
Exchange margin was 0.1% on buying and selling.
Interest on outlay of funds was 12% p.a.
You are required to show the calculations to:
(i) Cancel the Contract,
(ii) Execute the Contract, and
(iii) Extend the Contract as above.
(8 Marks)

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(b) KGF Bank’s Sydney branch has surplus of USD $ 7,00,000 for a
period of 2 months. Cost of funds to the bank is 6% p.a. They propose to
invest these funds in Sydney. New York or Tokyo and obtain the best yield,
without any exchange risk to the bank. The following rates of interest are
available at the three centers for investment of domestic funds there for a
period of 2 Months.

Sydney -------------- 7.5% p.a.

New York -------------- 8% p.a.

Tokyo -------------- 4% p.a.

The market rates in Australia for US Dollars and Yen are as under:

Sydney on New York.

Spot 0.7100/0.7300

1 Month 10/20

2 Months 25/30

Sydney on Tokyo:

Spot 79.0900/79.2000

1 Month 40/30

2 Months 55/50

At which center, will the investment be made & what will be the net gain to
the bank on the invested funds?
(8 Marks)
(c) Write short note on currency swap.
(4 Marks)

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