Q1
Rs 45 / $
= $
1
45
ii.
/ Re
= $ 0.022222 / Re
v. Rs 7.25 / FF
1
= FF
7.25
Q2
1
80
iii. Rs 25 / DM
/ Re
= DM
= 0.0125 / Re
vi.
Rs 108 /
=
/ Re
= FF 0.1379310/Re
Rs 80 /
1
108
/ Re
/ Re
= DM 0.04 / Re
vii.
=
= 0.009259 / Re
1
25
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 $
= $ 0.904159 /can$
v. AUS $ 1.10782/$
=$
1
1.10782
/ AUS $
= $ 0.902674/AUS$
ii.
0.61995 / $
=$
1
0.61995
= $ 1.613033 /
iii. 0.70744 / $
=$
1
0.70744
= $ 1.413547 /
iv
= $
DM 1.9875 / $
1
1.9875
/ DM
= $ 0.503144 / DM
vi. 90.225 / $
=$
1
90.225
= $ 0.0110834 /
Q3
per $
46.90 46.30
iii.
Rs 63 / 65 per
1
65
iv.
=
v.
1
6.4210
1
6.1563
1
78.45
per Re
per Re
63
1
79.10
per $
1.4236
per FF
vi.
1
710
1
675
vii.
1
255
1
250
per Rouble
100
0.1104
100
0.1086
Q4
a.
b.
Rs 42.50 per $
$ 1.0563 per
180.80 per $
0.3264 per $
= 42.50 x 1.0563
= 180.80 x 0.3264
= Rs 44.89275 per
= 59.01312 per
c.
0.9033 per $
0.6437 per $
180.75 per
d.
= 180.75 x 0.6437 x
=180.80 x
0.9033
3.5255
= 128.804135 per
/ 181.30 x
1
3.5250
e.
0.6125 per $
DM 1.3275 per $
108 per $
= 0.6125 per $
Direct quote in UK
, ,
= 0.6125 x 1.3275
= 0.461394 / DM
= 0.6125 x
1
108
= 0.005671 per
=
$
, ,
=
=
=
=
1
0.6125
$ 1.632653 per
1
1.3275
$ 0.753296 per DM
1
108
$ 0.009259 per
Contd:
0.6125
x = 1.3275 x
= DM 2.167347 per
= 1.3275
= DM 1.3275 per $
= 1.3275 x
108
= DM 0.0122917 per
, $ ,
Given
108 x
176.326531
108
108 per $
f.
0.6125
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 $
x 12
= 5.616 % p.a
Discount on Re
x 12
46.30 46.95
46.95
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
x 12 = 0.20
3
50
x 12 =  0.10
F = Rs 48.75 per $
F = 52.5
Rs 52.5 per $
x12 =  0.10
50
50
=
=
x 12 = 0.20
F = 47.619
3 month forward rate Rs 47.619 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
0.8075 per
b. Spot rate is
If 6 month forward rate is
i.
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
47.75 47.30
2 month forward
47.30
x 100
47.90 47.30
3 month forward
47.30
x 100
48.40 47.30
6 month forward
47.30
x 100
Premium or discount on Re
i.
1 month forward
x 100
47.30 47.50
47.50
x 100
ii.
47.30 47.750
2 month forward
47.75
x 100
47.30 47.90
3 month forward
47.90
x 100
47.30 48.40
6 month forward
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 month forward
3
iv.
x 100
47
x 100
6 month forward
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 $
10
CLASSES
PRAVINN MAHAJAN CA
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
11
CLASSES
1,00,000
185
, i.e 540.541
PRAVINN MAHAJAN CA
Q14
Given
Spot
2 m forward
3 m forward
3 month forward
Spot
1.5955 x
1.5950 x
3.7600
1
3.7610
/ 1.5970 x
/ 1.5965 x
3.7570
1
3.7580
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
0.424827
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
12
CLASSES
PRAVINN MAHAJAN CA
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
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
=
=
=
=
45.97 x 1.7775 x
1
3.1380
26.039412
+ 0.032549
26.071961
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
1
240
1
265
= 0.002026
= 0.000003
0.002029
Q19
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
14
Total loss to customer 10,000 CLASSES
x 0.27 = Rs 2700
PRAVINN MAHAJAN CA
Q20
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
Q21
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
Q22
Bank has entered into forward contract for Selling $90,000 @ Rs 46.34/ $ due on 15 th March 08
customer did not approached the bank on/before/after date of Maturity ie 15 th March 08.
Bank will itself, after 14 days from date of maturity i.e on 15 th day from date of maturity cancel
the forward contract. For cancellation, Bank will enter into Purchase contract of 90,000 $ with
customer @ rate applicable on 30 th 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
On 30 th March
Bank will Sell $ at
Bank will Buy $ at
Rs 46.34
Rs 46.50
15 $
Loss to bank (or gain to customer )per
0.16 PRAVINN MAHAJAN CA
CLASSES
Total gain to customer which shall not be paid by bank to customer is 90,000 x 0.16
= Rs 14,400
Q23
AR constructions Ltd.
Bank has entered into 3 month forward contract for Selling 4,00,000 @ Rs 78.65 /
customer did not approached the bank on/before/after date of Maturity ie 15 th March 08.
Bank will itself, after 14 days from date of maturity i.e on 15 th day from date of maturity cancel
the forward contract. For cancellation, Bank will enter into Purchase contract of 90,000 $ with
customer @ rate applicable on 30 th 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
On 30 th 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
Customer booked a forward contract to buy 2,00,000 $ due on 5 th March. Customer did not
approach the bank PQR ltd.for cancellation of forward contract. The bank will on 15 th day after
maturity i.e on 20th March, suomoto cancel the contract.
In effect on 20th march a reverse contract is made on behalf of customer by PQR bank i.e
customer will sell 2,00,000 $ on 20th march. Since customer will Sell $ on 20th 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
16
CLASSES
PRAVINN MAHAJAN CA
Q25
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 rat e. 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
on 15th 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
Customer made a forward contract to sell 2,50,000 to bank @ Rs 102.30 / due on 15 th 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
Amount receivable as per original contract to Sell
2,50,000 x 102.30
17
CLASSES
255,75,000
PRAVINN MAHAJAN CA
Q28
258,38,700
2,63,700
customer made a forward contract to sell $ 5,00,000 to bank @ Rs 35.30 per $ due on 31 st oct.
On 30th 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
rate applicable on 30th sept. Since customer had to buy $ in reverse contract , so relevant rate is
ASK rate.
1 month forward ask rate on 30th sept is
Spot ask rate (inter bank)
+ swap points
+ margin .0020 x 37.58
37.40
0.18
37.58
0.07516
37.65516
Q29
176,50,000
188,27,580
11,77,580
Customer made a forward contract to sell 2,00,000 to retail bank (which in turn will sell these
s to wholesale bank) @ Rs 85.7475 / due on 15 th October 2007.
On 15th 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
forward contract on 15th june to buy on 15th October at following rate
Inter bank October Ask rate
+ margin of retain banker
October forward rate
85.7350
0. 0650
85.8000
171,40,000
171,60,000
18
CLASSES
PRAVINN MAHAJAN CA
Q30
20,000
customer made a forward contract to sell $ 7,50,000 at Rs 46.70 / $ to bank due on 15 th feb. On
15th Jan customer approached bank for extension of forward contract by one month.
On 15th jan following contracts will be made by customer with bank
1.
A reverse contract to cancel original contract of selling $ on 15th feb. i.e customer will make
one month forward contract on 15th jan to purchase $ 7,50,000 on due date 15th feb. since
customer had to buy $ so relevant rate is ASK rate. Thus customer will buy $ on 15 th feb @
Rs 46.71 / $
2.
New two month forward contract to sell $ 7,50,000 due on 15 th march. Since customer has to
sell $ , so relevant rate is BID rate. Customer will on 15 th 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
Q40
350,25,000
350,32,500
7,500
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
$
2.
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.
Q41
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.
19
CLASSES
PRAVINN MAHAJAN CA
= 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
2.
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
Q42
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
20
CLASSES
PRAVINN MAHAJAN CA
Q43
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
An Indian company Exported goods for 100 lac . is not quoted against Re. If Quote is
Re
, then
129.75 and
So,
Re
Re
$
Re
$
41.79
$
1
= 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
Re
144 and
Re
$
Re
$
43
1
= 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
21
CLASSES
PRAVINN MAHAJAN CA
This loss can be hedged if company book a forward contract today to sell in September
Re
137.35 and
Re
$
Re
$
42.89
Re
137.85 and
Re
$
Re
$
42.78
= 42.78 x 1371.85
= 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 .
Q45
Q46
22
CLASSES
PRAVINN MAHAJAN CA
5.70
= FF 5.428571 per $
1.05
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.
F S
S
x 365
60
45.20 45.60
45.60
60
x 365 =  0.0534
Discount on $ is 5.34%
2.
Q48
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
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 lac
30lac
= 3.6 per Re
108 lac
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 lac
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
Q49
3,50,000
7.834
= $ 44,677
23
CLASSES
PRAVINN MAHAJAN CA
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
Q50
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.
4
12
Rs 157,20,000
Rs 7,86,000
Rs 165,06,000
2,00,000
24
CLASSES
4
12
3,333
2,03,333
PRAVINN MAHAJAN CA
Rs 160,71,440
Re payment is lower in 2nd option, so PQR Ltd should make payment to UK firm after 4 months at
interest of 5 % p.a
Q51
To pay in 3 months @ 15% p.a and cover the exchange risk forward for 3 months
In this case. CC ltd will pay to vendor after 3 months along with interest of 15% p. a and will
book a forward contract today to purchase after 3 months
Amount of consignment
2,40,000
9,000
payable to vendor
Amount payable to purchase = 2,49,000 x ( 108.50 + 0.40)
b.
2,49,000
Rs 271,16,100
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
Since re outflow is lower in 1st option, So company should pay to vendor after 3 months along
with interest of 15% p.a
Q52
25
CLASSES
PRAVINN MAHAJAN CA
Amount of consignment
Interest payable to vendor @ 6% p.a for 30 days
50,000 x 0.06 x
30
$ 50,000
$
365
246.57
50,246.57
30
365
22,65,000
16,754.79
22,81,754.79
Since Re outflow is lower in 2nd option so, firm should pay to vendor in 60 days, by taking 30
days credit from Bank
Q53
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.
b.
c.
26
CLASSES
PRAVINN MAHAJAN CA
Q54
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 lac
340
x 100
Rs 1,000 lac
0.18 2
)
4
92.025
Rs 1,092.025 lac
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
Amount payable after 6 months to Indian Bank 10 lac (1 + 0.045) 2 = Rs 10.92025
Amount payable to Tokyo Bank after 180 days
3400 x ( 1 + 0.02x
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
3434 lac
345
x 100
Rs 995.3623 lacs
Total re outflow in 2nd option 10.92 lac + 995.3623 lac = Rs 1006.2823 lac
Total cash outflow in 2nd option is lower than cash outflow in option 1. Therefore, offer from
foreign branch should be accepted.
Q55
a.
US
Japan
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
Arbitrage profit
b.
France
India
24,40,000
=
=
242 .46
(10,063.5156 10,000)
24,40,000
10,063.5156 $
63.5156 $
27
CLASSES
PRAVINN MAHAJAN CA
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
UK
US
c.
Rs 14,00,000
6322
=
=
$ 10,089.912
$ 89.912
1.3695
$ 7,301
0.7236
e.
Frankfurt
New York
CHF 10,091.12
= $ 7361.059
= 10,090.55
0.7295
Arbitrage profit
Q56
London
DM 90.55
28
CLASSES
PRAVINN MAHAJAN CA
a.
DM
DM
180.80
181.30
per DM
3.5255 3.5250
= 51.283505 / 51.432624 per DM
b.
10,000
3.5255
5,12,835.06
51.2550
Q57
Arbitrage profit
New York
a.
= 2,836.4771
SFr
DM 10,005.56159
DM 5.5619
SFr
$
London
29
CLASSES
PRAVINN MAHAJAN CA
c.
$ 15,474.404
1.5335
1
1.5285
10,123.914
Arbitrage Profit
123.914
London

Q58
a.
$ 15,487.4470
1.5335
1
1.5285
Arbitrage Profit
New York
France
London
10,132.448
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 /
30
CLASSES
PRAVINN MAHAJAN CA
Q59
Spot rate
ROI
a.
c.
d.
Q60
62,306.5015
77.52
1,01,129.682 $
$ 1129.682
120 / $
8%
12%
SA (
b.
Rs 48,30,000
Swap rate =
=
=
1 + rA
1+ rB
3
12
120 x
3
1 + 0.12 x
12
120 x
1 + 0.08 x
1.02
1.03
118.834 per $
Premium or Discount on
S F
x 100
F
) x 12
120 118.834
x 100
118.834
3.9248 %
) x 12
Spot Rate
ROI
US
Germany
$ 0.6560 per DM
6.5%
4.5%
SA (
B
1 + rA
1+ rB
3
12
0.6560 x
3
1 + 0.045 x
12
0.6560 x
1 + 0.065 x
1.01625
1.01125
$ 0.65924 per DM
31
CLASSES
PRAVINN MAHAJAN CA
Q61
Spot Rate
ROI
India
US
a.
b.
Rs 45.50 / $
8%
2%
c.
1 + rA
SA (
1+ rB
6
12
6
1 + 0.2 x
12
1 + 0.08 x
45.50 x
45.50 x
Rs 46.85 per $
Premium or discount on $
1.04
1.01
F S
x 100
S
) x 12
46.85 45.50
x 100
45.50
5.93%
) x 12
OR
(1 + rcurrency)
( 1 + rBase Currency)
Q62
a.
Spot Rate
ROI
India
UK
Forward Rate
6
1.04 1.01
x 100
1.01
5.94%
=
=
=
=
Rs 85 /
9%
?
Rs 87
Let ROI in UK is
( 1 + rBase Currency)
x 100
) x 12
) x 12
87
87 (1 + p x
SA (
4
12
)=
1 + rA
1+ rB
4
12
4
1+ px
12
1 + 0.09 x
85 x
85 x 1.03
32
CLASSES
PRAVINN MAHAJAN CA
87 + 29 p
=
=
b.
Spot Rate
3 Month forward rate
ROI
London
US
Forward Rate (FA )
=
=
=
=
=
87.55
87.55 87
29
1.896552 %
$ 1.5654 /
$ 1.7500 /
2%
?
1 + rA
SA (
1.5654 x
1.7500 ( 1.005)
=
=
1.5654 x ( 1 + p x
=
=
a.
1+ px
Spot rate
ROI
India
US
1 + 0.02 x
3
12
3
12
0.39135
49.41% p.a
Rs 46.30 / $
10%
6%
SA (
B
1 + rA
1+ rB
6
12
6
1 + 0.6 x
12
1 + 0.10 x
46.30 x
46.30 x
Rs 47.199029 per $
1.05
1.03
Premium or Disc on $
(spot and forward rates) =
c.
3
12
1.5654 + 0.39135p
0.19335
b.
1.7500
1.75875
Q63
1+ rB
F S
x 100
S
) x 12
47.199 46.30
x 100
46.30
3.88%
) x 12
Premium or Disc on $
33
CLASSES
PRAVINN MAHAJAN CA
(interest rates)
(1 + rcurrency)
Q64
( 1 + rBase Currency)
( 1 + rBase Currency)
3.883%
) x 12
Spot Rate
=
3 month forward =
$ 2.450 /
$ 2.650 /
ROI
4%
2%
i.
=
=
=
=
ii.
(
(
S F
x 100
F
) x 12
2.450 2.650
x 100
2.650
3
=
 30.1887 %
Annualised discount on $ =
30.188%
1 + rA
Forward Rate (FA )
=
SA (
1+ rB
B
B
(according to interest rates)
) x 12
6
1.05 1.03
x 100
1.03
x 100
) x 12
3
12
3
1 + 0.2 x
12
1 + 0.04 x
2.450 x
2.450 x
1.01
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.
Q65
$ interest rate
(annually
compounded
FF interest rate
(annually
compounded)
Forward FF / $
Forward disc on FF
3 Months
6 Months
1 year
11.5%
12.25%
?
(**1)
19.5%
? (**6)
20%
? (**3)
? (**4)
? (**5)
 6.3%
7.5200
? (**2)
34
CLASSES
PRAVINN MAHAJAN CA
a.
SA (
7.5200
7.5200 (1 + x )
=
=
(1+x)
X
b.
=
=
7.05 x
1+ rB
1 + 0.20
1+ x
8.46
8.46
7.52
1.125  1
0.125 or 12.5%
=
=
=
c.
1 + rA
(**1)
S F
x 100
7.05 7.52
7.52
6.25%
(**2)
SA (
d.
Discount on FF
e.
f.
1 + rA
1+ rB
1.195
7.05 x
7.05 x
FF 7.173 / $
1.115
1.045543
1.027587
(**3)
=
(
x 100
S F
x 100
F
) x 12
7.05 7.173
x 100
7.173
6.859%
) x 12
(**4)
months
Discount on FF
0.063
0.0315 F
F
=
=
S F
x 100
F
6
7.05 F
F
6
7.05 F
7.2792
) x 12
(**5)
SA (
B
35
CLASSES
) x 12
1 + rA
1+ rB
PRAVINN MAHAJAN CA
1.0325106
1.093925
( 1 + x)
(1.093925)2
=
=
(1 + x )
0.1967
Or 19.67%
Q66
SA (
Q67
1 + rA
1+ rB
7.05 x
1.1225
) / SA (
1 + rA
=
=
46.50 x
( 1 + 0.12 x
( 1.03 )
1.1225
( 1 + x )
3
)
12
46.50 x
3
( 1 + 0.06 x )
12
( 1+x)
7.2792
1 + rB
(**6)
3
)
12
/ 46.75 x
3
( 1 + 0.05 x )
12
/ 46.75 x
( 1 + 0.14 x
(1.035)
( 1.015)
(1.0125)
Rs 47.187192 / 47.788889 per $
2.
SA (
B
1 + rA
1+ rB
) / SA (
B
3
)
12
46 x
3
( 1 + 0.06 x )
12
46 x
( 1 + 0.10 x
( 1.025 )
/ 46 x
1 + rA
1 + rB
3
)
12
/ 48 x
3
( 1 + 0.04 x )
12
( 1 + 0.12 x
(1.03)
( 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.
36
CLASSES
PRAVINN MAHAJAN CA
Q68
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.
2.
SA (
1 + rA
1+ rB
) / SA (
B
4
)
12
45.50 x
4
( 1 + 0.04 x )
12
45.50 x
( 1 + 0.6 x
1 + rA
1 + rB
4
)
12
/ 45.82 x
4
( 1 + 0.03 x )
12
( 1 + 0.09 x
( 1.02 )
(1.03)
/ 45.82 x
( 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
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
1.01
= $ 4,95,049.5049
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.
Q69
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.
2.
SA (
B
1 + rA
1+ rB
) / SA (
6
)
12
1.2635 x
6
( 1 + 0.035 x )
12
=
=
=
( 1 + 0.04 x
1.2635 x
( 1.02 )
1 + rA
1 + rB
6
)
12
/ 1.2680 x
6
( 1 + 0.03 x )
12
( 1 + 0.06 x
/ 1.2680 x
( 1.0175)
1.266604 / 1.286738 per
37
CLASSES
2,50,000
1.0175
(1.03)
(1.015)
, 2,45,700.2457
PRAVINN MAHAJAN CA
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
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.
Q70
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
1.
DM
2.
SA (
1 + rA
1+ rB
3
)
12
0.1650 x
3
( 1 + 0.06 x )
12
( 1 + 0.2x
= 0.1650 x
=
( 1.005 )
) / SA (
B
1 + rA
1 + rB
3
)
12
/ 0.1680 x
3
( 1 + 0.04 x )
12
( 1 + 0.03 x
(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.
Q71
Indian firm imports goods from US firm worth $ 2,00,000, payment to be made in 3 months. Since
Quotes are
a.
and Indian firm will buy $, so relevant rate is BID rate. Indian fir has 2 options
b.
$
Re
2,00,000
0.02193
= Rs 91,19,927
SA (
B
1 + rA
1+ rB
38
CLASSES
) / SA (
B
1 + rA
1 + rB
PRAVINN MAHAJAN CA
3
)
12
.02217 x
3
( 1 + 0.14 x )
12
( 1 + 0.08 x
= 0.02217 x
=
( 1.02 )
3
)
12
/ 0.0222 x
3
( 1 + 0.12 x )
12
( 1 + 0.09 x
(1.0225)
/ 0.0222 x
( 1.035)
(1.03)
$ 0.021849 / 0.022038 per Re
2,00,000
= $ 1,96,078.4313 $
= Rs 88,44,313.54533
0.02217
1.02
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.
Q72
P ltd purchased goods worth $ 51 lac from US, to be paid in 3 mont hs. Pltd want to ensure that
Re
1+ rB
) / SA (
B
=
=
40 x
( 1 + 0.13 x
( 1.0325 )
1 + rA
1 + rB
3
)
12
/ 42 x
3
( 1 + 0.08 x )
12
/ 42 x
( 1 + 0.16 x
(1.04)
( 1.0275)
(1.02)
Rs 40.194647 / 42.823529 per $
1 + rA
3
)
12
40 x
3
( 1 + 0.11 x )
12
=

SA (
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
US co. has payable 4,80,000 after 3 months and receivable 1,38,000 after 3 months.
Thus net to be bought after 3 months 3,42,000
39
CLASSES
PRAVINN MAHAJAN CA
Since quote is
PRAVINN MAHAJAN CA
Q74
Shoe company sold goods to German company for 50,000 DM to be received in 90 days.
a.
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
=
=
S F
x 100
F
1.71 1.70
365
x 100 x
90
1.70
=
2.385%
Interest rate in Germany is lower than interest rate in US by 2.385 %
Q75
1.
, and UK firm has to sell $ , So relevant rate is ASK rate. F Ltd has 2 options
2.
1,97,000
1,15,454.492
1.7063
SA (
B
1+ rB
) / SA (
3
)
12
1.7106 x
3
( 1 + 0.125 x )
12
( 1 + 0.06 x
= 1.7106 x
=
1 + rA
( 1.015 )
1 + rA
1 + rB
3
)
12
/ 1.7140 x
3
( 1 + 0.095 x )
12
/ 1.7140 x
( 1 + 0.9 x
(1.0225)
( 1.03125)
(1.02375)
$ 1.683465 / 1.7119072 per
41
CLASSES
PRAVINN MAHAJAN CA
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
1.740
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.
2,93,000
1.6967
SA (
1+ rB
) / SA (
6
)
12
1.7106 x
6
( 1 + 0.125 x )
12
( 1.03 )
1 + rA
1 + rB
6
)
12
/ 1.7140 x
6
( 1 + 0.095 x )
12
( 1 + 0.9 x
(1.045)
/ 1.7140 x
( 1.0625)
(1.0475)
$ 1.65827 / 1.709909 per
1 + rA
( 1 + 0.06 x
= 1.7106 x
= 1,72,688.159
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
SA (
B
1 + rA
1+ rB
42
CLASSES
PRAVINN MAHAJAN CA
6
)
12
2.5 x
6
( 1 + 0.12 x )
12
=
=

( 1.075 )
( 1.06)
N$ 2.535377 per
5,00,000
N$ 4,65,116.279
1 .075
2.5 x
( 1 + 0.15 x
4,65,116.279
1,86,046.512
2.5
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.
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.
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
on 1st march 07 B Ltd, a US firm, purchased an equipment from foreign firm for LC 9,00,000 due
on 31st may 07
Spot rate today (1st March) LC 10 / $
43
CLASSES
PRAVINN MAHAJAN CA
9,00,000
$ 90,000
10
9,00,000
$ 1,00,000
b.
$ 10,000
$ 4,000
$ 96,000
$
12 %
4.8%
7.2%
LC
8%
3.2%
4.8%
3
12
10 x
3
1+0.072 x
12
1+0.048 x
Synthetic rate
(Bid)
10 x
1.012
1.018
LC 9.941061 / $
1.
8,89,328.06 LC
$ 88,932.81
$ 90,533.60
$ 90,533.60
44
CLASSES
$ 1,12,500
$ 22,500
$ 9,000
$ 1,03,500
PRAVINN MAHAJAN CA
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
Rs
$
, Relevant rate
b.
=
=
1+ rB
3
)
12
43.65 x
3
( 1 + 0.0425 x )
12
( 1 + 0.09 x
( 1.0225 )
43.65 x
( 1.010625)
Rs 44.162894 / $
1 + rA
SA (
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
Rs
b.
SA (
B
1 + rA
1+ rB
45
CLASSES
)
PRAVINN MAHAJAN CA
6
)
12
70.50 x
6
( 1 + 0.06 x )
12
=
=

( 1 + 0.11 x
( 1.055 )
70.50 x
( 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
b.
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.
1,20,000
SA (
1.5050 x
( 1.0075 )
( 1.006667)
$ 1.5062454 /
( 1 + 0.09 x
1+ rB
1
)
12
1.5050 x
1
( 1 + 0.08 x )
12
1 + rA
1,77,171
1.5050
$ 1,77,171
1,17,721
46
CLASSES
PRAVINN MAHAJAN CA
1,17,721 x 1.006667
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
1.
2.
SA (
=
=
=

1,00,000
1 + rA
1+ rB
2
)
12
1.5000 x
2
( 1 + 0.12 x )
12
( 1 + 0.06 x
1.5000 x
( 1.01 )
( 1.02)
$ 1.4852941 /
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.
Firm will book a forward contract today to sell 10,00,000 $ after 3 months @
(35.60 + 1.25) = Rs 36.85 / $
47
CLASSES
PRAVINN MAHAJAN CA
Rs 360,85,000
Rs 349,06,892
12
$ 9,85,221.67$
12
c.
$ 9,37,500
Rs 333,75,000
Since Re amount received in 2nd option is highest , so 2nd option should be accepted
Q81
Spot rate
3
12
Synthetic forward rate  1.235 x
3
1+0.09 x
12
1+0.095 x
= 1.235 x
=
1.02375
/
/
3
12
1.24 x
3
1+0.08 x
12
1+0.105 x
1.24 x
1.02625
1.0225
1.02
can $1.236509 / 1.247598 per $
Q82
Spot rate
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
48
CLASSES
PRAVINN MAHAJAN CA
Case 1
Case 2
Case 3
Q83
Spot rate
3 month forward rate
DM 3.6248 3.6292 /
DM 3.6360 3.6398 /
3
12
Forward rate according to IRPT = 3.6248 x
3
1 +0.04 x
12
1+0.05 x
= 3.6248 x
1.0125
3.6292 x
3
12
3.6292 x
3
1+0.03 x
12
1+0.06 x
1.015
1 .01
1.0075
=
DM 3.633772 / 3.649890 per
Since quotes overlap each other, so arbitrage does not exist
49
CLASSES
PRAVINN MAHAJAN CA
Q84
Spot rate
3 month forward rate
C$ 0.665/DM
C$ 0.670/DM
Interest DM 7%
C$ 9%
3
12
Forward rate = 0.655 x
3
1 + 0.07 x
12
1 +0.09 x
= 0.655 x
1+0.0225
1 + 0.0175
= C$ 0.6682/DM
For arbitrage profit,Borrow C$ and deposit DM
Borrow 1 lac C$ @ 9% for 3 months.
(Amount payable after 3 months 1,00,000 x 1.0225) = C$ 1,02,250
2. Convert 1,00,000 C$ into DM at spot rate C$ 0.665 /DM = 1,50,375.938 DM
3. Deposit 1,50,375.938 DM @ 7% for 3 months
4. DM receivable after 3 months 1,50,375.938 x 1.0175 = 1,53,007.5 DM
5. Convert 1,53,007.5 DM into C$ at C$ 0.670 /DM
1,53,007.5 x 0.670 =
C$ 1,02515
Arbitrage profit = 1,02,515 1,02,250 = C$ 265
1.
Q85
Spot rate
0.5711 0.5714 / $
3
12
0.5711 x
3
1 + 0.0820 x
12
0.5711 x
1+0.105 x
=
3 month forward rate
1.02625
3
12
0.5714 x
3
1 + 0.08 x
12
1+0.11 x
0.5714 x
1.0205
0.574317 / 0.575601 per $
1.0275
1.02
Since synthetic forward rate and 3 month forward rate are overlapping each other, so arbitrage
opportunity does not exist
Q86
Spot rate
1 +0.09 x
0.665 x
1.0225
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

50
CLASSES
PRAVINN MAHAJAN CA
Q87
265.0375 can $
48.0213 /$
48.8190/$
Spot rate
180 days forward rate
6
12
48.0123 x
6
1 + 0.07 x
12
48.0123 x
1+0.12 x
1.06
1.035
49.17207/$
SA (
B
0.05 2
0.75 x
0.75 x
0.75 x 1.17359
0.08 2
0.1
0.16
1.10522
=
0.706307 / $
Thus if 2 year forward rate is 0.706307 / $, arbitrage opportunity will not
exist.
Actual 2 year forward rate is 0.85 / $
Since synthetic rate is less than forward rate so borrow and deposit $
Arbitrage process
51
CLASSES
PRAVINN MAHAJAN CA
1.
2.
3.
4.
5.
Q89
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)
Q90
$ 350
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 / $
52
CLASSES
PRAVINN MAHAJAN CA
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
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
53
CLASSES
PRAVINN MAHAJAN CA
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
Indian company has to receive $ 1,50,000 after 3 months. Indian company has 3 options
Option 1
Hedging through currency options
Call option gives right to buy Re and Put option gives right to sell Re. since Company has to
sell $ ( i.e buy Re), so company will buy call option and sell $ after 3 months
@ $ 0.02264 / Re
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.
Q92
a.
Sun Ltd, a UK co. has to receive $ 2,40,000 on 30 th 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
54
CLASSES
PRAVINN MAHAJAN CA
30,000
2,40,000
30,000
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
5 contracts x 600
2,40.000
Amount received on due date
1.60
Net amount received
Premium paid
Q93
1,50,000
1,50,000
1.60
3,000
1,50,000
1,47,000
55
CLASSES
$ 0.085
$ 0.120
$ 0.035
PRAVINN MAHAJAN CA
Premium received
On due date Put holder will not exercise Put option as $ is
expected to depreciate and will appreciate, i.e on due date
MP > EP, so put holder will sell in market.
Arbitrage Profit
Q94
$ 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.
Q95
$
Since quote is
, relevant
12,000 $
Due date
56
CLASSES
PRAVINN MAHAJAN CA
EP
MP
$ 1.97 /
1.91 x 0.25 + 1.95 x 0.6 + 2.05 x 0.15
= $ 1.955
MP < EP , call will not be exercised
US firm will purchase from market @ $ 1.955 /
Amount paid 3,00,000 x 1.955
2.
5,86,500 $
5,98,500 $
3.
2,93,398.53
1.0225
To deposit 2,93,398.53 co. will borrow $
$ to borrowed is ascertained is ascertained by converting
2,93,398.53 @ spot rate of $ 2 /
$ borrowed 2,93,398.53 x 2 = 5,86,
$ 5,86,797.06 $
$ 6,02,933.98 $
$ 5,88,000
4.. No Hedging
Co. will buy 3,00,000 after 180 days at spot after 180 days of
$ 1.955 /
$ payable 3,00,000 x 1.955
$ 5,86,500
3,64,897
Contract size
1.70
2,14,645.29
12,500
57
CLASSES
PRAVINN MAHAJAN CA
2,14,645.2941
Number of contacts
12,500
= 17.17
contracts
= 3,61,250
= 3,64,897
3,647.8
For shortage of $, company will book a forward contract to purchase 3,647.8 $ after 6
months @ $ 1.5455/
Statement of Payment
Premium paid 2,12,500 x 0.96
payable for payment of premium
20,400 $
13,062.69
20,400
1.5617
2,12,500
3647 .8
2,359.75
1.5455
2,27,922.44
Hedge through forward market
Company will book a forward contract today to buy 3,64,897 $ in 6 months @
$ 1.5455 / . Company will pay
3,64,897
1.5455
= 2,36,102.88
= 2,28,512.18
PRAVINN MAHAJAN CA
Principal + interest
Forward rate
Value of commitment 20,30,000 x 48.4575
ii.
20,30,000 $
48.4575/$
9,83,68,725
Q98
Currency
$
DM
Ffr
Loan
Payable
10,45,000
19,131.45
29,268.73
41,890.49
1,43,309.86
FR
Amt()
54.80
35.95
25.15
7.35
10,45,000
10,48,403
10,52,211
10,53,546
10,53,327
$
DM
Ffr
Loan
Payable
10,45,000
19,131.45
29,268.73
41,890.49
1,43,309.86
FR
Amt()
54.30
35.60
24.85
7.20
10,45,000
10,38,837.74
10,41,966.79
10,40,978.68
10,31,830.99
PRAVINN MAHAJAN CA
Q99
480 lac
$ 50,000
24,25,000
15,76,250
$ 50,000
24,50,000
15,92,500
490,00,000
3,50,000
486,50,000
Cost of debt is, rate at which present value of all future cash outflows is equal to
principal
480,00,000 =
15,76,250
15,92,500
490,00,000
PV of cash outflows @ 7%
=15,76,250 x 0.935 + 505,92,500 x 0.873
= 14,73,794 + 441,67,253
= 456,41,047
Pv of cash outflows @ 4%
= 15,76,250 x 0.962 + 505,95,200 x 0.925
= 15,16,353 + 468,00,560
= 483,16,913
For diff of 3%, change in value is 26,75,866. For diff in value of 3,16,913 diff in
rate is
3,16,913
26,75,866
x 3 = 0.355
PRAVINN MAHAJAN CA
b.
= 8,54,058 $
c.
d.
e.
= $ 7,32,050
A
5%
(6%)
9%
8%
B
10%
(9%)
6%
7%
PRAVINN MAHAJAN CA
b.
($ 1000 Lac)
50
$ 1000 lac
$ 444.44 lac
(80 lac $)
$ 364.44 lac
($ 1000 Lac)
50
$ 1370.370
(80 lac $)
$ 290.37 lac
PRAVINN MAHAJAN CA
(2325 mil)
2437.5 mil
492.5 mil
(372 mil)
233 mil
(2345 mil)
Q104 UK company sold goods for $ 50,00,000, receivable in 1 year. Company has 2
options.
1. Borrowing $ 50,00,000 and convert into
UK co. will borrow $ 50,00,000 for 1 year @ 3.5%
Co. will convert $ 50,00,000 into at spot rate $ 1.4165 /
And receive
50,00 ,000
34,59,011
1.4455
36,57,904
$ 1,75,000
1,75,000
1,23,544
1.4165
36,57,904 1,23,544
35,34,360
50,00,000
35,29,827
1.4165
35,29,827
PRAVINN MAHAJAN CA
2374.62
2.3688
Net receipts
ii.
3,19,397 2374.62
3,17,022.38
7,50 ,000
2.3688
= 3,16,616
M
8%
T + 0.6
Floating
Fixed
Floating
Prefrence
Interest according to own prefrence =
Interest under swap
=
Benefit of swap
=
=
Case 1 :
If benefit shared equally
Share of M
Share of S
=
=
S
9.20
T + 1.20
Fixed
T + 0.6 + 9.20
8 + T + 1.2
T + 9.8 ( T + 9.2)
0.6 %
0.3
0.3
64
CLASSES
PRAVINN MAHAJAN CA
Share of M
Share of S
=
=
0.45
0.15
Q107 a
P
10
L +0.2%
fluctuating
Fixed
Floating
Prefrence
Q
11.6
L+ 0.5%
Fixed
P fluctuating
Q Fixed
L+0.2
10%
11.6
Intermediary
L+ 0.5
10%
Bank
Fixed
65
CLASSES
L + 0.5%
Bank
Fluctuating
L + 0.2 + 11.6
10 + L + 0.5
L + 11.8  ( L + 10.5 )
1.3 %
PRAVINN MAHAJAN CA
Share of Intermediary
Share of P
Share of Q
Cost to each Party =
P
=
Q
=
=
=
=
0.13
0.585
0.585
A
11
M +0.2%
fluctuating
b.
Fixed
Floating
Prefrence
B
12.3
M+ 0.6%
Fixed
A fluctuating
B Fixed
M+0.2
11%
12.3
Intermediary
M+ 0.6
11%
Bank
Fixed
66
CLASSES
M + 0.2 + 12.3
11 + M + 0.6
M + 12.5 ( M + 11.6)
0.9 %
0.1
PRAVINN MAHAJAN CA
Share of P
Share of Q
=
=
0.48
0.32
f.
A
5
L +0.5%
fluctuating
Fixed
Floating
Prefrence
B
6
L + 0.75%
Fixed
A fluctuating
B Fixed
L+0.5
5%
Intermediary
L+0.75
5%
Bank
Fixed
Recd. = L + 0.5 + 6
Paid = 5 + L + 0.75
Benefit of Swap
Share of I
A
B
67
CLASSES
= L + 6.5
= L + 5.75
0.75
0.25
0.25
0.25
L + 0.75%
Bank
Fluctuating
L + 0.5 + 6
5 + L + 0.75
L + 0.5 + 6 ( 5 + L + 0.75)
0.75
PRAVINN MAHAJAN CA
Share of Intermediary
Share of A
Share of B
Cost to each Party =
P
=
Q
=
=
=
=
0.25
0.25
0.25
g.
A
10
L +0.5%
fluctuating
Fixed
Floating
Prefrence
B
12
L + 1.5%
Fixed
A fluctuating
B Fixed
L+0.5
10%
12
Intermediary
L+1.5
10%
Bank
Fixed
Recd. = L + 0.5 + 12
Paid = 10 + L + 1.5
Benefit of Swap
Share of I
A
B
68
CLASSES
= L + 12.5
= L + 11.5
1.00
0.1
0.45
0.45
L+1.5%
Bank
Fluctuating
L + 0.5 + 6
5 + L + 0.75
L + 0.5 + 6 ( 5 + L + 0.75)
PRAVINN MAHAJAN CA
=
=
=
=
Share of Intermediary
Share of A
Share of B
Cost to each Party =
A
=
B
=
0.75
0.25
0.25
0.25
h.
Fixed
T
PLR
Prefrence
14
T+4
P+2
fixed
12
T+3
P+3
T
15
T+5
P+4
PLR
T = T+5 ( T+4) = 1
P = P+4 (P+2) = 2
Highest of all difference 2, associated with PLR. Out of PLR lowest rate is alloted
to A. under swap A is alloted P+2
3.
= 14 + T+3 + P + 4
= 12+P+2+T+5
= 2
Share
Share
Share
Share
=
=
=
=
of
of
of
of
I A
B
C
=
=
=
=
2 x 0.25
= T+P+21
= T + P + 19
0.5
0.5
0.5
0.5
Q108
A
69
CLASSES
B
PRAVINN MAHAJAN CA
Fixed
Floating
Prefrence
a.
9.5
L +2
fluctuating  L
13.5
L+2
Fixed12
A fluctuating
B Fixed
L
9.5
12
Intermediary
L+2
9.5%
Recd. = L + 12
Paid = 9.5 + L + 2
Benefit of Swap
Share of I
= L + 12
= L + 11.5
0.5
0.5
Bank
Fixed
c.
Bank
Fluctuating
Q109
L+2%
=
=
=
=
=
=
=
=
Dealer quotes All in cost of generic swap @ 8% against 6 month L on notional principal
of 5,00,000
a.
b.
Q110
70
CLASSES
PRAVINN MAHAJAN CA
L
L+ 0.25
Intermediary
Loan = Fluctuating
Cost to each Party
b.
=
=
=
Next 2 years
ABC
7.5
ABC
7.5
L
Intermediary 1
Intermediary 1
8
Intermediary 2
Loan 7.5%
Loan L 0.25%
71
CLASSES
=
=
7%
7.25%
PRAVINN MAHAJAN CA
Q111
Since fixed rate funding achieved by 2nd option is cheaper so, 2 nd option is better
Dealer quotes All in cost of generic swap @ 8% against 6 month L on notional principal
of 6,00,000
c.
d.
Q112
Y
9.5%
L+2%
Float = ?
Fixed
Floating
Prefrence
H
13.5%
L+2%
Fixed = 12%
Y fluctuating
H Fixed
???
9.5
12
Intermediary
L+2
9.5%
Recd. = ??? + 12
Paid = 9.5 + L + 2
Benefit of Swap
Share of I
= x + 12
= L + 11.5
0.5
0.5
Bank
Fixed
L+2%
Bank
Fluctuating
72
CLASSES
PRAVINN MAHAJAN CA
L
= cost under own prefrence
=
L+2  L
=
13.5 12
M
7
L +0.6
fluctuating
Q113
Fixed
Floating
Prefrence
C
8.2
L+1.2
Fixed
M fluctuating
C Fixed
L + 0.6
7%
8.2
Intermediary
L+1.2
7
Recd. = L +0.6 + 12
Paid = 7 + L + 1.2
Benefit of Swap
Share of M
C
= L + 8.8
= L + 8.2
0.6
0.4
0.2
Bank
Fixed
L+1.2%
Bank
Fluctuating
73
CLASSES
L + 0.6 + 8.2
7 + L + 1.2
L + 8.8 ( L + 8.2 )
PRAVINN MAHAJAN CA
Share of M
Share of C
Cost to each Party =
M
=
Q
=
0.6 %
=
=
0.4
0.2
Q114
X
7.5%
L + 0.25
floating
Fixed
Floating
Prefrence
Y
8.45%
L + 0.37
fixed
X fluctuating
Y Fixed
L
7.6
7.75
Intermediary
7.5%
Recd. = L + 7.75
Paid = 7.6 + L
Benefit of Swap
Share of I
Bank
Fixed
b. Cost to each Party =
X
=
Y
=
= L + 7.75
= L + 7.6
0.15
0.15
L + 0.37
Bank
Fluctuating
74
CLASSES
PRAVINN MAHAJAN CA
c.
Q115
=
=
=
=
=
=
=
=
Derivative bank entered into plain vanilla swap through OIS in which Bank will pay at fixed rate
and receive at floating rate
OIS is an interest rate swap involving a fixed rate being exchanged for an
indexed rate like LIBOR or MIBOR. LIBOR or MIBOR is an overnight refrence rate.
READ
Note  Under OIS, Interest would be computed on a NOTIONAL PRINCIPAL amount for
fixed rate and on the floating side, INTEREST AMOUNTS ARE COMPOUNDED ON DAILY
BASIS
Statement of amount received by bank under floating rate
Day
Principal
Tuesday
10,00,00,000
Wednesday
10,00,21,233
Thursday
10,00, 43,567
Friday
10,00,65,823
Saturday & Sunday
10,00,87,618
Monday
10,01,31,382
Interest received under floating
MIBOR
7.75%
8.15
8.12
7.95
7.98
8.15
Interest
21,233
22,334
22,256
21,795
43,764
22,358
1,53,740
Bank received 317 in net settlement i.e amount received under floating is more than amount
paid under fixed by 317
Amount paid under fixed 1,53,740 317 = 1,53,423
75
CLASSES
PRAVINN MAHAJAN CA
1,53,423
Q116 a.
Spot rate
Inflation rate
100,00,000
SA (
b.
1 + iA
1+ iB
= 7.999 or 8 %
3
)
12
2.70 x
3
( 1 + 0.02 x )
12
( 1.0125 )
2.70 x
$ 2.72/
Spot rate
3 month forward rate
Inflation in germany
Inflation in US
( 1.005)
DM 1.50/$
DM 1.51/$
4%
?
1.51
1.51 x + 1.51
X
=
=
1 + iA
SA (
Spot rate
Inflation rate
( 1 + 0.05 x
c.
365
1 = $ 2.70
5%
2%
US
London
x 100
1+ iB
( 1 + 0.04 x
1.50 x
3
)
12
( 1 + X)
1.5150
1.32%
46.5 /$
India
9%
US
4%
% Premium or discount on $
1 + iA
SA (
1+ iB
46.5 x
48.73
=
=
76
CLASSES
( 1 + 0.09 )
( 1 + 0.04)
x 100
46.5 48.73
48.73
x 100
4.57%
PRAVINN MAHAJAN CA
% Premium on Re.
x 100
48.73 46.5
46.5
x 100
=
4.80%
d. Cost of transistor in US
$ 22.84/ transistor
In Singapore S$ 69/Transistor
In Moscow RR 3240/transistor
According to law of One price, exchange rate in
Singapore
$
$
= 69 x
Moscow
$
1
= S$ 3.0210 /$
22.84
= 3240 x
Exchange rate in singapore
Moscow
1
22.84
= RR 141.85 /$
S$ 1.63/$
RR 250 /$
Cost of transistor in US in $
$ 22.84/Transistor
$ 42.33 / Transistor
1
250
$ 12.96 / transistor
100 / racket
$ 150 / racket
PRAVINN MAHAJAN CA
$ 165 = 100
i.e $1.65/
Thus after 1 year, $ depreciated.
Q117 a.
14.5%
?
6.5%
8.5%
1 +
1 +
1 + .085
1 + .065
=
=
1 +
1 +
1+
1 + .145
(1.085)(1.145) = (1+x)(1.065)
x
( 1.085)(1.145)
(1.065)
1
= 0.1665 or 16.65%
b.
11%
9%
5%
?
=
=
1 +
1 +
1 + .09
1 + .11
= 0.03108
= 3.108 %
c.
Rate of inflation on $
On
Spot rate
1 year forward rate
Forward Rate (FA )
?
8%
40.10/$
41.80/$
=
SA (
B
78
CLASSES
1 + iA
1+ iB
PRAVINN MAHAJAN CA
40.10 x
41.80 + 41.80x
43.308
( 1 + x)
43.308 41.80
41.80
=
d.
( 1 + 0.08 )
41.80
0.03607 or 3.607%
9%
12%
DM 3.5/FF
SA (
e.
f.
1 + rA
1+ rB
1.12
3.5 x
DM 3.5963 / FF
1.09
24 x (
2 yr forward rate
24 x
3 Yr forward rate
24 x (
) (1.05)
1.02
1.07
(1.02 )2
1.07 3
1.02
= 26.435/SF
(1.05)2 = 29.1176/SF
) (1.05)3 =
32.0722/SF
= 90.28/
82 x (1.03 ) (1.05)
2 yr forward rate
3 Yr forward rate
82 x (1.03 )3 (1.05)3 =
1.08
1.08
109.44/
PRAVINN MAHAJAN CA
1.04
1.02
4350 lac
870 lac
174 lac
5046 lac
44.45 / $
5046
$ 113.521 lac
44.45
$ profit in India
$ 13.521 lac
434 .72
380 lac MS
60.8 lac
6.08 lac
434.72 lac
$ 109.50 lac
3.97
$ profit in Malaysia
$ 9.50 lac
1.14
1.12
US
(1 + x)
(1+x)
X
=
=
Cash outflow
1.14
1.12
( 1.08)
1.0993
9.93 %
PV
$ 110 lac
PRAVINN MAHAJAN CA
Cash inflow
20 lac
25 lac
30 lac
40 lac
50 lac
1e
2e
3e
4e
5e
0.910
0.827
0.753
0.685
0.623
NPV
NPV (10.015 x 48)
$ 18.2 lac
$ 20.675
$ 22.59
$ 27.4
$ 31.15 lac
$120.015 lac
$ 10.015 lac
480.72 lac
1 +
1 +
1 +
1+
1.09
1.03
1.07
(1+x)(1.07) = (1.03)(1.09)
1.1227
X
= 1.07  1
X =
4.93%
81
CLASSES
PRAVINN MAHAJAN CA
1 +
1 +
1.03
1.0493
X=
=
=
1 +
1 +
1+
1.16
(1.03 )(1.16)
1.0493
 1
= 13.87%
Statement of NPV
Amount
Time
250 lac
0
75 lac
1
95
2
125
3
135
4
PV of cash inflow
NPV in EA $
54.06
NPV in Re
Cash outflow
Cash Inflow
Factor
1
0.878
0.771
0.677
0.595
Present value
250 lac
65.85
73.25
84.63
80.33
304.06
54.06
27.03 lac
Forward rate
A$ 2/Re
1.07
2 x 1.09 = 1.963
1.07
95
125
1.927 x
135
Cash outflows
Cash Inflows
1.07
1.09
1.07
= 1.892
Re cash flows
125
38.21
49.30
66.08
72.70
Statement of NPV
Amount
Time Factor
125
0
1
38.21
1
0.862
49.30
2
0.743
66.08
3
0.641
72.70
4
0.552
PV of Cash inflows
82
CLASSES
Present value
125
32.94
36.63
42.36
40.13
152.06
PRAVINN MAHAJAN CA
NPV
27.06
Adjusted CF
 50,000
 1,650
 2,420
3,328
Adjusted Rand CF
 2,00,000
+ 70,000
+ 1,37,200
+ 2,46,960
1.4
Year 1
6 x
Year 2
7.6364 x
Year 3
9.7190 x
1.1
1.4
1.1
1.4
1.1
Rand 7.6364
Rand 9.7190
Rand 12.3696
Statement of NPV
Amount
period
PV factor(20%)
PV
Cash outflows
2,00,000
6
(33,333.33)
(50,000)
3,328
3328 + 0.20
(83,333.33) 0
(83,333.33)
(1,650)
(2,420)
19,968
0.833
0.694
0.579
(1,374.45)
(1,679.48)
(11,561.47)
1
2
3
(97,948.73)
Cash inflows
Operating CI
70,000
7.6364
1,37,200
9.7190
2,46,960
19,965.08
12.3696
0.2
9,166.62
0.833
7,635.79
14,166.68
0.694
9,831.68
1,19,790.48 3
0.579
69,358.69
NPV
83
CLASSES
86,826.16
(11,122.57)
PRAVINN MAHAJAN CA
Q124
Currency
$
Ffr
UK
Jap
18,82,500
0.37
) = 50,87,838
CANADA
20 $
40$
35$
60$
10$
40$
25$
10$
20$
GERMANY
UK
30$
84
CLASSES
PRAVINN MAHAJAN CA
30$
a. Bilateral netting
10 $
USA
25$
CANADA
20$
10$
15$
UK
GERMANY
10$
i.
ii.
iii.
Iv
VI
85
CLASSES
PRAVINN MAHAJAN CA
(3020+3510+6040)
= + 55
GERMANY
(20 30+1025+4030)
=  15
CANADA
UK
= 0
=  40
Under multilateral netting,
UK and canada will pay 40$ and 15$ to US for final settlement.
Q127
UK
60
GERMANY
100
200
$125
75 $
150
USA
GERMANY
PRAVINN MAHAJAN CA
100
200
60
100
100
USA
Multilateral Netting
GERMANY
UK
(40 100+100100)
= 60
USA
150 ,00,000
Canadian subsidiary
UK subsidiary
1.48
250 ,00,000
101,30,000 $
158,23,000 $
1.58
30,00,000 x 1.5
Total
101,35,000
45,00,000 $
203,23,000
Centralised cash management will facilitate to adjust deficit with surplus. Thus
net surplus with American company is 203,23,000 101,35,000 = 101,88,000 $
87
CLASSES
PRAVINN MAHAJAN CA
Q129 a.
b.
$ 125 .15625
5767.57 lac
0.0217
60 lac
0.185 lac
60.185 lac
60 .185
0.015
4012.33 lac
5000 lac
26.67 lac
( 5026.67 lac)
4753.23 lac
125
0.0215
60
0.0149
88
CLASSES
5813.95 lac
4026.85 lac
(5000 lac)
4840.80 lac
25.01018 lac
4865.81 lac
PRAVINN MAHAJAN CA
f.
Since in hand after 30 days is higher if cash is pooled in India and balance is
. invested in India, so investment in India is better option
30,000
1.249
30,000
1.27
24,019
23,622
397
Q132 A trader in London purchased on 31st Dec 1500 tons of X @ Escudos 11,820 / ton
from portugal, payable immediaely
500 tons of X will be shipped to germany @ DM 462/Ton at the end of January,
payment in respect of which will be received at the end of february and 1000 tons
will be shipped at the end of february, payment in respect of which will be received
at the end of March.
Statement of Profit
Payment of Escudos in portugal at spot rate of
Escudos 107.45 /
11,820 1500
107 .45
89
CLASSES
1,65,007
PRAVINN MAHAJAN CA
500 462
60,000
3.85
(Since swap point are decreasing, so reduced from spot rate to ascertain
forward rate)
1,20,784
3.825
Net profit
15,777
Cash outflows
Fixed Assets
Initial working capital
Statement of NPV
Amount
Period
Factor
PV
5,00,000
5,00,000
1
1
5,00,000
5,00,000
3.791
0.621
0.621
6,44,470
3,10,500
3,10,500
2,65,470
Cash inflows
Operating cash inflows
Terminal value 10,00,000 x 0.5
Release of working capital
0
0
1,70,000
15
5,00,000
5e
5,00,000
5e
Net present value
Since NPV is positive project should be accepted.
If skylark rejects the project, enitre export sales of 500 units per month will be lost
Statement of annual profit from exports to UAE
Sales
500 x 12 x 60
3,60,000
Less variable cost 500 x 12 x 40
2,40,000
PBT
1,20,000
Less taxes
60,000
90
CLASSES
PRAVINN MAHAJAN CA
60,000
Profits on exports to UAE will be lost whether project to establish plant in
UAE is accepted or rejected. So such profit on exports is in the nature of sunk cost.
Thus loss of profit on exports, if project si rejected will not affect decision
Q134 OJ Ltd a UK company is entering into JV with south American company for
implementation of project in South America
1. If Exchange controls exist.
Statement of Received by OJ from JV annually
Year Cash flows (SA $) OJ share (SA$) 50% div (SA$) Exch rate OJ share
1
4,250
2,125
1,062.5
SA$ 10/
106.25
2
6,500
3,250
1,625
SA$ 15 / 108.33
3
8,350
4,175
2087.5
SA $ 21/
99.40
rd
In 3 year balance 50% p.a can be transfrred (1062.5 +
1,625 + 2,087.5) SA $ 21/ 227.38
Cash outflow
Investment
Cash Inflow
Operating cash inflow
Statement of NPV
Amount
Period
Factor
PV
450
450
106.25
108.33
326.78
1
2
3
0.862
0.743
0.641
91.59
80.49
209.47
(68.45)
Cash outflow
Investment
Cash Inflow
Statement of NPV
Amount
Period
Factor
PV
450
450
91
CLASSES
PRAVINN MAHAJAN CA
212.5
216.67
198.81
1
2
3
0.862
0.743
0.641
183.18
161
127.44
21.62
3,50,000
= 5.7485 x 1.4920
Invoice value in FF 3,50,000 x 8.5768
3 month forward rate 5.7833 x 1.4873
Receipts after 3 months
FF 8.5768 /
FF 30,01,880
FF 8.6015 /
3,48,995
2,25,000
$ 2,21,675
1 .015
1,48,576
1,50,433
PRAVINN MAHAJAN CA
Risk free rate in India is 6% and risk premium is 8% over risk free rate. Money rate
in India 14%
Real cf(in bhat)
600mil
Forward rate
0.8
480
1.06
350 mil
350 mil
0.785 x
350 mil
0.770 x
1.06
1.08
1.06
1.08
= 0.770
302.81
= 0.756
Cash outflows
Cash inflows
291.24
315.15
PV
480mil
255.42
232.86
212.73
701.01
221.01mil
Money CF (HKD)
300
Forward rate
5.75
100
100
100
100(1.06)3 = 119.10
100
1.07
1.07
1.07
1.07
Cash outflow
Cash inflows
Amount
1725
592.54
611.24
630.04
650.19
93
CLASSES
time
0
1e
2e
3e
4e
Factor
1
0.873
0.763
0.666
0.582
Present value
1725
517.29
466.38
419.61
378.41
PRAVINN MAHAJAN CA
PV of cash inflows
NPV
Since NPV of project is positive, so project should be accepted.
1781.69
56.69
2.22
0.9
2.47
0.9
2.74
= A$ 2.47 /
= A$ 2.74 /
0.9
Cash outflow
Cap expenditure
Working capital
= A$ 3.04
Statement of present value of cash Flows
Amount
Time Factor
Pv
A$
(20%)
10,00,000/2
5,00,000
0
1
5,00,000
5,00,000/2
2,50,000
0
1
2,50,000
Cash inflow
Operating cash inflows
Realise value of WC
3,49,099
7,75,000/2.47
3,13,765
7,75,000/2.74
2,82,847
7,75,000/3.04
2,54,934
5,00,000/3.04
1,64,474
PV of Cash inflows
NPV
7,75,000/2.22
1e
2e
3e
4e
4e
0.833
0.694
0.579
0.482
0.482
2,93,443
2,17,753
1,63,768
1,22,878
79,276
8,77,118
1,27,118
94
CLASSES
SA (
B
1 + rA
1+ rB
PRAVINN MAHAJAN CA
2.22
2.22 ( 1.2)
2
 1 =
1 +
1 .20
0.332 or 33.2%
10,00,000
5,00,000
0
0
1
1
10,00,000
5,00,000
Cash Inflow
Operating cash inflows
7,75,000
14e 2.055
Release of working capital 5,00,000
4e
0.318
PV of cash inflows
NPV
NPV in 251625 / 2
Q139 a.
PV
15,92,625
1,59,000
17,51,625
2,51,625
1,25,812
ii.
PRAVINN MAHAJAN CA
13,65,000
13,86,000
25,025
13,60,975
30,82,000
31,28,230
31,16,000
= 1.5685 x
= 1.5865 x
3
12
1 + 0.1425 x
3
12
1.0175
1.035625
= $ 1.558734
For hedge in money Market company will borrow and deposit $
96
CLASSES
$ 28,99,262
PRAVINN MAHAJAN CA
18,92,561
29,50 ,000
1.5865
x 1.035625) 19,25,682
220,05,000
2,20,050
344,05,000
121,79,950
45,000
450
97
CLASSES
PRAVINN MAHAJAN CA
Credit
60,000
30,000
75,000
1,65,000
Nostro Account
Particulars
Balance b/d
Remitted by TT
Total
Balance over bought
Debit
75,000
75,000
25,000
credit
1,00,000
1,00,000
PRAVINN MAHAJAN CA
Particulars
Balance b/d
Purchase TT
Issued a draft on london
Remittance outward
Purchased bills on london
Forward sales
Total
Balance over purchase
Debit
5,000
50,000
75,000
1,30,000
Credit
20,000
25,000
75,000
1,20,000
10,000
Debit
20,000
Credit
50,000
45,000
95,000
Nostro Account
Particulars
Balance b/d
Purchase TT
Remittance outward
Export bill realised
Total
Balance over bought
25,000
45,000
50,000
3,75,000
3,28,000
163,86,000
146,06,250
PRAVINN MAHAJAN CA
12,20,080
28,85,640
1,61,190
nil
1,61,190
EL is to receive 250 lac swiss francs after 2 months. El has obtained hedge through currenc y
futures
EL will short sell index futures of 250 lac swiss francs today
Statement of receipts
Amount received on sale of 250 lac CHF after 2 months at spot rate
after 2 months
250 lac x 0.4985
124.625 lac $
Future
Sell 250 lac CHF future @ $ 0.5150 / CHF
250 x 0.5150
Number of contracts
250
1,25,000
= 200 contracts
Q143
128.75 lac $
125.625 lac $
3.125 lac $
$ 127.75 lac
$ 56.880 lac
Futures
Amount paid for purchase of 40 lac futures @ $ 1.4190/
40 lac x 1.4190
$ 56.76 lac
Amount received on sale of 40 lac futures @ $ 1.4250 /
100
CLASSES
PRAVINN MAHAJAN CA
40 lac x 1.4250
Profit on currency futures
Q144
$ 57.00 lac
$ 0.24 lac
$ 56.64 lac
140000
86,741.06
1.6140
Future
Buy future @ $ 1.59 /
140000
future to be bought
= 88050.314
Number of contracts
1 .59
88050
25000
bought
88050.314 (3.522 contrats) future bought for
140000 $
88050.314 (3.522 contrats) future sold @ 1.6100 /$ 141761 $
Profit on futures in $
1761 $
$ profit in futures converted in at spot rate
1761
in june @ $ 1.6140 / 1.6140
1091
Net receipts
Q145
87832.016
558,00,000
Future
Co. will sell future today @ 122 / $
future to be sold $ 450000 x 124 = 549,00,000
Amoumt receivable on selling 549,00,000 futures today
101
CLASSES
= $ 4,50,000
PRAVINN MAHAJAN CA
= $ 4,46,341.46
$ 3,658.53 $
4,50,000
553,50,000
Q146 Nitrogen Ltd, has to export goods to the amount of 4 Million to germany,
receivable after 6 months. Nitrogen Ltd has 3 options
(i)
(ii)
(iii)
34,14,426
Statement of Receipts
received on selling 4 million in spot market at
40 ,00,000
spot rate after 6 months 1.1785
33,94,145
Future
Nitrogen Ltd will buy future today @ 1.1760 /
40,00,000
future to be bought 1.1760 = 34,01,361 futures
Size of each future contract 62,500
102
CLASSES
PRAVINN MAHAJAN CA
= 54.422 contracts
39,69,000
39,77,438
8,438
7,160
1.1785
34,01,305
(ii)
100000
47,01,457
0.02127
46,88,233
Futures
103
CLASSES
PRAVINN MAHAJAN CA
( 4,72,000 ) = 10 contracts
$ payable for purchasing 47,21,435 futures
$ receivable after 3 months on selling
47,21,435 futures @ $ 0.02134 /
$ profits in future market
1,00,000
1,00,755
755
755
0.02133
No hedging
XYZ will sell 1,00,000 $ after 3 months at spot rate after
3 months. received
35,396
47,23,629
3,000
47,20,629
46,88,233
$ 80037.50
$ 80100
62.50
104
CLASSES
PRAVINN MAHAJAN CA
= 42.85 x
1
7.5880
= 5.647 / HKD
5,64,700
= 74.3200 x
1
11.4200
= 6.508 / DK
= 49.2625 x
1
7.5610
= 6.515 /Dk
ii.
31,20,000
3,60,000
PRAVINN MAHAJAN CA
18,72,000
7,20,000
11,52,000
25000
51.50
25000
51.75
25000
485.44
483.09
= 2.35 or
2 .35
485.44
x100
=
=
=
0.48%
1.5
0.72%
2417 units
7,25,100
11,46,900
11,52,000
5,100
Q153 AB Tech has to borrow $ 100 lakh after 30 days for 90 days. So company will buy
1x4 FRA @ L+ 1% with L at 6%
Actual L after 30 days is 7.5%. company will sell FRA after 30 days at 7.5%
Amount of compensation received by AB
106
CLASSES
PRAVINN MAHAJAN CA
( )
(1+
)
12
1 + 0.075
12
3
12
0.36809 Lac
=
Effective rate of Borrowing for AB
Amount of Loan required
Compensation received
Net loan taken
Amount payable after 90 days
100 lacs
0.36809 lacs
99.63191 lacs
99.63191 x
Effective rate =
( 1 + 0.085 x
3
12
101.74908 100
100
101.74908 lacs
= .069963 0r 7%
0.5 r
1
1.015625
= 0.06596 0r 6.6 %
r
Q155
1.049125
1.03425
0.25 r
= 0.0708 or 7.08 %
( 1 + 0.065 x
3
12
) ( 1 + 0.0695 x
3
12
107
CLASSES
1.03391
PRAVINN MAHAJAN CA
12
1.03425
Profit on Re 1
Q156
1.
Price of 3 x 6 FRA
( 1 + 6 Month rate ) =
6
( 1 + 0.05 x
) =
12
(1.025)
(1.01125) ( 1 + 0.25 r )
0.25 r
=
r
2.
0.00034
( 1 + 0.045 x
1.025
1.01125
3
12
) ( 1 + r x 12 )
1
5.44%
) =
0.5 r =
( 1 + 0.05 x 12 ) ( 1 + r x 12 )
1.065
1.025
1
r =
7.805%
Actual price of 6 X 12 FRA = 6.5/ 6.75%
Since Equilibrium price is more than actual price, so trader will buy FRA
Statement of profit
Re 1 is borrowed for 6 months @ 5% and @ 6.75%
For next 6 months. Amount payable after 12 Months
6
6
( 1 + 0.05 x 12 ) ( 1 + 0.0675 x 12 )
=
1.05959
1.065
0.00540
Q157 P & Co. is considering to borrow 60 crores after 6 months for a period of 3
months. Current rate of interest is 9%.To hedge against risk of increase in rate of
interest after 6 months, company will buy 6 x 9 FRA today at 9.3%
a. If 3 month rate of Interest after 6 month is 9.6%
Co. will sell FRA after 6 month @ 9.6%
Amount of compensation received by P & Co.
=
( )
(1+
)
12
108
CLASSES
PRAVINN MAHAJAN CA
12
(0.096 0.093 ) 60 3
=
12
3
1 + 0.096
12
0.0439 crore
=
Effective rate of Borrowing for P & Co.
Amount of Loan required
Compensation received
Net loan taken
60 crores
0.0439 crore
59.9561 crore
Effective rate =
Ii
61.395 crore
1 + 0.096 x 12 )
61.395 60
60
x 12 = .093 or 9.3%
( )
(1+
)
12
12
(0.088 0.093 ) 60 3
1 + 0.088
12
3
12
 0.073385 crores
Effective rate =
61.395 60
60
60 Crores
0.073385 crores
60.073385 crores
3
12
61.395 crores
x 12 = .093 or 9.3%
Q158 Co. will borrow 500 lakh after 3 months for a period of 6 months.
109
CLASSES
PRAVINN MAHAJAN CA
a. Company can use FRA to hedge against increase in Interest rates. Since Co.
has to borrow funds, so company will buy 3x9 FRA today @ 5.94%
i.
( )
(1+
)
12
12
6
1 + 0.045
12
12
=
3.520782 lacs
Effective ROI to company
Loan required
Amount payable by company
Amount borrowed
Amount payable after 6 months
6
503.520782 ( 1 + .045x12 )
Effective ROI
ii.
514.85 500
500
500 Lac
3.520782 lac
503.520782
514.85 lac
x 12 = 5.94%
( )
(1+
1 + 0.045
6
12
12
)
12
12
= 1.369193 lac
500 Lac
1.369193 lac
498.631 lac
PRAVINN MAHAJAN CA
498.631 ( 1 + .065x
12
Effective ROI
514.8365 lac
514.8365 500
500
x 12 = 0.059346 or 5.94%
6
12
6
12
0.0135 x 500 x
1 + 0.045
= 3,30,073.35
500 Lac
3,30,073.35 lac
503,30,073.35
514,62,500
12
Effective ROI
ii.
514.625 500
500
x 12 = 5.85%
6
12
6
12
0.0065 x 500 x
1 + 0.065
= 1,57,385
500 Lac
1,57,389
498,42,611
PRAVINN MAHAJAN CA
Effective ROI
514,62,496
514.62496 500
500
x 12 = 5.85%
Contracts
=
50,000
=
500 lac
=
500,00,000/ 50,000 = 1000
=
1000 x 2
= 2000
( )
(1+
(0.055 0.0525 ) 100 3
Q160 i.
1 + 0.055
3
12
12
)
12
12
= 6,16,523
= 1.085764  1
= 0.05042 or 5.042%
Price of 2x3 FRA for ABC
(1.0578)3 = (1.0548)2 ( 1+ x)
X =
ii.
1.183615
1.112603
 1 = 6.3825%
Bank offers interest rate guarantee to XYZ (that ROI will not exceed 5.04%) at a
premium of 0.1% of loan amount
Amount of Interest payable by XYZ if actual rate of Interest is
a. 4.5%
XYZ will pay interest at 4.5% I.e Guarantee will lapse. Total cost will be
4.5% interest + 0.1% premium payable to Bank
Amount payable by XYZ
=
100 crore x 0.046 = 4.6 crore
b. 5.50%
112
CLASSES
PRAVINN MAHAJAN CA
If ROI is 5.5%, XYZ will exercise Interest rate guarantee and pay interest
@ 5.04%. So total cost of XYZ is 5.04% + 0.1% i.e 5.14%
Amount payable = 100 crore x 0.0514 = 5.14 crore.
Q161
a.
To hedge against fall in interest rate, treasurer will short FRA today.
b.
c.
Company will sell FRA today at 1.5% and will buy FRA at 1.25%
gain to company is 0.25%
Amount of compensation
( )
(1+
12
)
12
Q162
Loan Amount
Rate of Loan
Reference rate
Reset period
Total period of loan
Date
31/12/13
1 + 0.0125
3
12
12
93,453.2858
100 Lac
L + 0.5
6 Month LIBOR
6 month
3 years
Cap rate 7%
Floor rate 4%
PRAVINN MAHAJAN CA
30/06/14
31/12/14
30/06/15
31/12/15
30/06/16
7%
5%
3.75%
3.25%
4.25%
181
184
181
184
182
1096
16,00,751
100
Q163 a.
3,71,918
2,77,260
2,10,752
1,89,041
2,36,202
1096
24,975

Floor Rate
Notional amount
Reset Period
Refrence rate
Quarter
1
2
3
4.
Q164
Premium
3,47,123
2,77,260
2,10,752
2,01,643
2,36,202
16,00,651
8%
100 crore
3 Months
3 Month MIBOR
12,602

4%
200 Crore
3 Month
3 Month MIBOR
MP
( Actual LIBOR)
4.7%
4.4%
3.8%
3.4%
Cap rate(EP)
4%
4%
4%
4%
10,00,000 (0.2%)
30,00,000 (0.6%)
40,00,000
Cap rate
Borrowing rate
Notional amount
Period of Loan
Reset Period
150 lac x 1% =
1.5lac
114
CLASSES
8%
L + 10%
150 Lac
24 month
6 Month
PRAVINN MAHAJAN CA
1.50
3.673
Half yr
= 40,838
Actual
Strike
LIBOR
Price
9%
8%
9.5%
8%
10%
8%
Additional amount paid
1
2
3
Q165
Recd from
Bank
75000
1,12,500
1,50,000
3,37,500
ABC
Fixed
4.5%
P+2
Prefrence
Fixed
Floating
Premium
Net Receipt
40,838
40,838
40,838
hedged upto
34,162
71,662
1,09,162
2,14,986
DEF
Floating
5%
P+3
(a) Swap should be arranged between ABC and DEF, where ABC will take floating and
DEF will take Fixed rate loan
ABC fixed
DEF Float
4.5
P+2
P+3
Intermediary
5%
P+2
Recd. = 4.5 + P+3
Paid = 5 + P + 2
Benefit of Swap
Share of ABC
DEF
Bank
Float
Cost to each Party =
ABC
=
Y
=
= P + 7.5
= P+7
0.5
0.25
0.25
5%
Bank
Fixed
4.25%
P+2.75%
1
2
Actual PLR
2.75%
(1.03)2 = (1.0275)(1+x)
Payable rate(P+2.75)
2.75 + 2.75 = 5.5
Cap rate
5.625
effective rate
5.5
3.2506 + 2.75
115
CLASSES
PRAVINN MAHAJAN CA
X = 3.2506
= 6.0006
5.625
5.625
3 (1.032)3=(1.0275)(1.032506)
(1+x) = 3.6011
3.6011 + 2.75
= 6.3511
5.625
5.625
4 (1.033)4 =(1.0275)(1.032506)
(1.036011)(1+x)
= 3.6006
3.6006 + 3.75
= 6.3506
5.625
5.625
22.375
Rate p.a =
22.375
4
= 5.59375 %
Cap rate
Borrowing rate
Notional amount
Period of Loan
Reset Period
Q166
Premium
200 lac x 1% =
2
3.717
Half yr
1
2
3
7%
L + 0.25%
200
24 month
6 Month
2 lac
= 53,807
Actual
Strike
LIBOR
Price
8%
7%
8.5%
7%
10%
8%
Additional amount paid
Recd from
Bank
1,00,000
1,50,000
2,00,000
4,50,000
Premium
Net Receipt
53,807
53,807
53,807
hedged upto
46,193
96,193
1,09,162
2,88,579
Q167 ABN Amro bank wants to purchase 150 lac from canara bank. Current interbank rate
is 51.3625 51.3700 / $
Since quote is
150,00,000
51.3625
= $ 2,92,042
9% p.a
12% p.a
9 12 = 3%
=
=
12
3
6.5 6.6
6.6
116
CLASSES
x 100
12
3
x 100
PRAVINN MAHAJAN CA
Since the forward discount is greater than interest rate differential there will be
arbitrage inflow into India.
The decision taken by Mr E was not correct because as Interest rate parity theory,
forward rate of sale should be 1 FFr = 6.65, calculated as follows:
Let F be the forward rate then as per IRP theory, it should have been as follows:
6.6
12
x 3 x 100 =  3
6.6
6.6
6.6
3
400
Amount payable to purchase Can$ 7,05,000, if call otion with strike price of 0.95
is bought at 1.64c / can$
Premium payable 0.0164 x 7,05,000
11,562
Amount payable for 7,05,000 Can$ 7,05,000 x 0.95 6,69,750
6,81,312
117
CLASSES
PRAVINN MAHAJAN CA
Since amount payable is lower if cover is taken in forward market in both I month
payment and 3 month payment, so forward market hedge is better.
Q170 office of Bank in London is considering to invest surplus funds of $ 5,00,000 in
London or Frankfurt or Newyork. Cost of funds is 4%.
If Investment is made in london
Purchasing for $ 5,00,000 at spot rate
5,00 ,000
1.5390
3,24,886
4,061
3,28,947
3,27,285
1662
$ 5,10,000
$ 5,05,000
$ 5,000
3,231
= 1.5390 x
received
1
1.8260
5,00,000
$ 0.842826
5,93,242
0.842826
597,691
3,29,306
3,27,285
2021
118
CLASSES
PRAVINN MAHAJAN CA
Sales
3 month forward rate
Re sales
Sp/unit
No. of units sold
VC/Unit
Total variable cost
Total contribution
Contribution ratio
ii.
Statement of Contribution
Japan
USA
78,00,000
$ 1,02,300
2.427/
$0.0216/
32,13,844
47,36,111
Europe
95,920
0.0178/
53,88,764
650
12000
225
27,00,000
11.99
8000
510
40,80,000
133,38,719
107,30,000
26,08,719
19.56%
Spot rate
Re sales
Variable cost
Contribution
Japan
2.459/Re
31,72,021
Contribution ratio
Q172
$ 10.23
10,000
395
39,50,000
Total
USA
$ 0.02156
47,44,898
Europe
0.0179
53,58,659
Total
132,75,578
107,30,000
25,45,578
19.17%
PRAVINN MAHAJAN CA
PBT
Less tax
PAT
Less withholding tax
Amount transferred to US ()
($) 22,71,15,000 / 48
120
CLASSES
36,05,00,000
10,81,50,000
25,23,50,000
2,52,35,000
22,71,15,000
47,31,563
PRAVINN MAHAJAN CA