Académique Documents
Professionnel Documents
Culture Documents
Panigrahi
Q. 1 Consider the following exchange rates :
US $ Equivalent
US Market
Singapore Dollar (S$) 0.6330/33
Spot
3 – month forward 0.6357/60
Euro (€) Spot 1.2818/21
3 – month forward 1.2898/01
Equivalent Singapore $
Singapore Market
Euro (€) Spot 2.0379/82
You are required to
a. Verify whether there is a possibility of triangular arbitrage to exploit the difference between S$-Euro cross rates in the U.S.
market and the S$-Euro rates in the Singapore market. Indicate clearly which currency you would buy/sell and in which
market.
If you have $1 million, calculate the profit or loss from the triangular arbitrage.
b. Compute what is the 3-month risk less interest rate in the U.S. (expressed as effective annual rate), if risk less rate of interest in
the Singapore market for 3-month is 3.25% p.a. compounded annually?
a. In the U.S. market the cross rate of S $/Euro is:
=
= 0.8028%
By interest rate Parity.
Or, 1+ rus =
rus = 0.01233 for 3 months
Effective annual rate = (1 + 0.01233)4 – 1 = 1.05024 – 1 = 5.024%.
Q. 2 A Finance company in Mumbai proposes to invest rupee funds equivalent to €10 million for one year in London market. The
return on investment over the period of investment will be 8%. The current exchange rates are as follows:
Rs./€ Spot 53.15/53.20
1- year forward 53.25/53.30
A foreign bank has agreed to offer €10 million at a rate of Rs.53.10/€ and swap the same amount at Rs.53.20/€ after one year. The
rupee cost of the funds to the company is 7%.
You are required to calculate the actual returns earned under forward cover and swap deal and suggest the company whether it
should go for the simple forward cover or accept the foreign bank’s offer.
Ans. Rupee out flow at spot rate for acquiring €10 million 10 × 53.20 = Rs.532 million
Rupee cost of funds = 532 × 0.07 = 37.24 million
Return from Investment = 10 × 0.08 million
= € 0.80 million
Total inflow = 10 + 0.80 = € 10.80 million
Rupee inflow if covered through forward market = 10.80 × 53.25
= Rs.575.10 million
Net gain = 575.10 – [500 + 37.24] = Rs.37.86 million.
Return =
Q.3 The finance manager of a shipping company in Mumbai proposes to send a remittance of SFr 1 million to the parent company
in Zurich on July 18, 2005. The finance manager approaches the banker for a better rate to send the remittance. The banker in
Mumbai agrees to load an exchange margin of 5 paise by covering the transaction either through inter-bank market in Mumbai,
or Bahrain market or Singapore market whichever is favorable to the company. The spot exchange rates in Mumbai, Bahrain
and Singapore markets on July 18, 2005 are given below.
Mumbai Rs. / $ 43.50 / 52
Rs. / £ 79.20 / 22
Rs. / CHF 34.34 / 35
Bahrain CHF / £ 2.3070 / 72
Singapore CHF / $ 1.2688 / 90
You are required to determine
(a) The market in which the dealer should opt to cover the position to send the remittance of SFr 1 million.
(b) The income to the banker in sending the remittance.
Ans.
a. (i) If the banker covers in the local inter-bank market of Mumbai
Spot selling rate = 34.3
5
Add Exchange margin = 0.05
Rate to be quoted = 34.4
0
= (Rs. / £)ask ×
= 79.22 ×
= 34.3389.
Say Rs. 34.3
4
Add Exchange margin 0.05
Rate to be quoted 34.3
9
(iii) If the banker covers the transaction in Singapore market
(Rs. / CHF)ask = (Rs. / $)ask × ($ / CHF)ask
= (Rs. / $)ask ×
= 43.52 ×
= 34.3
0
Add Exchange margin 0.05
34.3
5
The dealer should quote Rs. 34/35 / CHF by covering the transaction in Singapore market.
b. Income to the banker in the transaction (34.35 – 34.30) = 1000000 × 0.05 = Rs. 50,000.
< TOP >
Q.4. Lucky Diamond company received orders to export diamond jewelry to Germany at the rate of one consignment every month
in August, September and October 2005. Amounts will be received at the end of each month. The company has the option to
invoice the exports either in US $ or euro. The terms are as under:
US $ Euro To be received at the end of
First consignment 121500 100000 August 05
Second consignment 182625 150000 September 05
Third consignment 243800 200000 October 05
You, as the Finance Manager of the Company have the following forecast for the exchange rates at the end of the following
months:
August September October
$ / Euro 1.2155 / 56 1.2180 / 81 1.2198 / 99
Rs. / $ 43.52 / 54 43.56 / 58 43.60 / 62
You are required to suggest the currency in which the company should invoice for each of the consignment:
(a) If the exposure is hedged.
(b) If the exposure is left uncovered.
Ans.
Rs. / euro rates can be calculated as follows:
Forward rates
(Rs. / euro)bid: (Rs. / $)bid × ($ / euro) bid
Aug 05 : 43.58 × 1.2160 = Rs.52.99
Sept 05 : 43.62 × 1.2188 = Rs.53.16
Oct 05 : 43.66 × 1.2200 = Rs.53.27
Expected rates
(Rs. / euro)bid Aug 05 : 43.52 × 1.2155 = Rs.52.90
Sept 05 : 43.56 × 1.2180 = Rs.53.06
Oct 05 : 43.60 × 1.2198 = Rs.53.18
able to make risk less profit. Assume that he has Rs.1 lakh with him. He will buy Pound for rupee
.He will get pound 100000/85 = 1176.47, Immediately will sell pound for dollar at the cross currency
When the above dollar is sold for rupee he will get Rs.100058 (2187.05 × 45.75)
Arbitrage profit =100058 – 100000 = Rs.58.
Q. 6 Mr. Alex approaches an authorized dealer in Mumbai for 8 months rupee-AED swap. Mr. Alex will buy 1.6 million Arab
Emirates Dirham (AED) spot against rupee and sell 1.6 million AED 8 months forward against rupee. The forward markets for
AED is almost non-existent. The exchange rates and interest rates in the market are as follows:
Rs./AED Spot 12.15
8 months Rupee interest rate (p.a.) 5.0%
8 months AED interest rate (p.a.) 3.5%
You are required to find the swap margin if the bank wants to maintain an exchange margin of 0.5% in the forward leg.
Ans. Suppose swap is done at the spot rate if Rs./AED 12.15. The bank borrows AED 1.6 million at 3.5% for 8 months and delivers
it to the customer. The bank will invest the rupee amount received from the customer at 5% for 8 months.
Rupee inflow = 1.6 × 12.15 = Rs.19.44 million
1 month borrowing and deposit rates for the bank are 7.5% p.a. and 4% p.a. respectively.
You are required to determine the amount to be collected from /paid to the customer due to early delivery.
Federal Bank entered into an agreement to buy S$ 3-m forward at 27.45. The bank covers the transaction with
a contract to sell the S$ in the inter bank market 3-m forward.
On early delivery date the bank buy S$ from the customer at the agreed upon forward rate of 27.45, and sell the same at the
spot rate of 27.34. Due to early delivery, there is additional cash outflow to the bank on 14/11/2005 to the extent of difference
between the spot sell and forward purchase contract rate ie. Rs (27.45-27.34)=Rs. 0.11. Since the additional cash outflow is
with the bank for 28 days ie. till the original contract date. The bank will charge interest on this amount at its 1 month
borrowing rate (FEDAI rule)
The bank will do a swap by selling the S$ in the spot market on the day of early delivery and buying forward. In this process
the bank would square off the forward contract it had entered into to cover itself from the original contract. That is it sells spot
at 27.34 and buys forward at 27.70. The difference between this two is Rs.0.36, the bank will recover from the customer. The
swap loss can be recovered by Federal Bank at the time of early delivery or on the date of original contract due date.
Therefore the total amount to be collected from the customer is Rs. (36,00,000-6328.77) = Rs.3606328.77
Q. 8 Magnum Pension Fund, an offshore investment company floated by a multinational investment banker in Canada has invested
in a few selected mutual funds in India for a period of one year.
Rs./C$ one year ago Rs.35.4706/10
Rs./C$ now Rs.39.3712/16
Unit value of investment Rs.90,000
Cash flow at the end of six months Rs.5,000
Cash flow at the end of one year 1,01,100
Reinvestment rate in India 7%
Inflation rate in India 5%
Inflation rate in Canada 3%
You are required to
a. Compute nominal rate of return to the company.
b. Compute the real rate of return to the company.
c. Compute the real rate of return to an Indian Investor who invested in the same mutual fund.
Ans. Nominal rate of return to Magnum Pension Fund
That is
2493.05 + 127.61 = 2537.31 (1 + r)
or 2620.65 =2537.31 (1 + r)
or r = 3.28%
Real rate of return for an Indian investor.
The amount is invested in India itself; hence the exchange rate will not be considered. Inflation rate should be
considered while computing the real rate of return.
Cash flow invested will grow by the end of the year to 5,000 = Rs.5175
Total inflow at the end of the year = 101100 + 5175
= Rs.1, 06,275
Q. 11 An MNC based in Zurich Switzerland has identified surplus funds to the tune of CHF 5 million for three months. The
treasury manager has collected the following information from his banker to invest in any currency including home currency to
earn more interest without exposing the investment to exchange risk. For this purpose he proposes to cover the amounts under
forward rates.
Spot CHF / $ 1.2686 / 88
3 months 0.0060 / 0.0058
Spot €/£ 1.4986 / 88
3 months 0.0036 / 0.0038
Spot $/£ 1.8197 / 99
3 months 0.0025 / 0.0024
3 months interest rates (p.a.)
CHF : 1.2% – 1.8%
€: 2.00% – 2.6%
$: 3.00% – 3.6%
£: 4.00% – 4.6%
You are required to determine the currency in which the company should invest to earn more interest on the surplus funds.
Ans. The company can invest in home currency (CHF) at 1.2%, $ at 3%, £ at 4.00% and euro at 2% for 3 months.
(i) Investment in CHF
50,00,000 × = 50,15,000
Return after 3 months = 50,15,000 – 50,00,000 = CHF 15,000
(ii) Investment in $
Surplus of CHF 5000000 is to be converted into $ and is invested at 3%. The amount in $ is converted into CHF by
covering at 3 months forward rate.
CHF 5000000 converted into $ at 1.2688
Amount received in $ =
= $ 3940731.4
Invest at 3% for 3 months
= 3940731.40
= $ 3970286.89
Convert into CHF at forward buying rate of 1.2626 (1.2686 – 0.0060)
= 3970286.89 × 1.2626
= CHF 5012884.23
Return after 3 months = 5012884.23 – 5000000
= CHF 12884.23
(iii) Investment in £
CHF / £ spot bid rate = 1.2686 × 1.8197 = 2.3085
CHF / £ spot ask rate = 1.2688 × 1.8199 = 2.3091
CHF / £ 3 months forward bid rate = 1.2626 × 1.8172 = 2.2944
CHF / £ 3 months forward ask rate = 1.2630 × 1.8175 = 2.2955
Surplus of CHF 5000000 is to be converted into £ at CHF / £ spot selling rate
Amount received in £ =
= £ 2165345.81
= (Rs. / $)bid ×
= 43.58 ×
= Rs. 5.7255
b. Cancellation charges
The exporter booked forward contract for Skr 500000. However the exporter received Skr 400000 on June 30, 2005.
Therefore the bank cancels the remaining amount of Skr 100000 on June 30, 2005 as requested by the exporter.
The forward purchase contract balance of Skr 100000 is cancelled at the ready TT selling rate on June 30, 2005
Rs. / $ Spot selling rate 43.2
7
Add: Exchange 0.04
margin
43.3
1
TT selling rate of Rs. / Skr : (Rs. / $)ask × ($ / Skr)ask
: (Rs. / $)ask ×
= 43.31 ×
= Rs. 5.68
Bank buys Skr from exporter at : 5.7255
Bank sells Skr to exporter under : 5.6800
cancellation
Exchange difference payable to exporter 0.0455
Amount payable under the contract
= 100000 × 0.0455
= Rs. 4,550
Exporter is paid Rs.4,450 after deducting Rs.100 towards flat charge for cancellation.
c. Cash flows to the exporter
400000 × 5.7255 = 22,90,20
0
Charges payable for = 4,450
cancellation
22,94,65
0
or or – 0.022989 = 0.00046
x = 42.647 say Rs. 42.65
If the FII invested $ 5 million in Indian security
Amount invested in rupees = 5 × 43.50 = Rs.217.50 million
The value of investment after one year = 217.50 × 1.1875 = Rs.258.28 million