IFM Problems
IFM Problems
IFM Problems
FINANCIAL
MANAGEMENT
US$0.62 FF FF 3.65
------------- x -------- = ---------------
DM US$ 0.17 DM
PROBLEM:-2 CROSS RATE
The US$ Thai Bhat exchange rate is US$
0.02339/Bhat, and the US$ Indian Rupees is
US$0.02538/INR . Suppose that INR is not quoted
against Thai Bhat . What is the Bhat/INR?
= 46*1.71/46.15*1.74
= 78.66/80.30
DG /pound 3.9380/90
3.957/90
Et =Eo (1+rhc/1+rfc)t.
Where et = expected forward rate for time t.
Eo = spot rate
rhc =rate of interest in home currency.
Rfc =rate of interest in foreign currency.
T= time period.
1.82( 1+ 0.03/1+ 0.05) x 4//12 = 0.595
PROBLEM
------------------------------- X 100
spot rate
42.8020-42.001 12
---------------------- x100 x -------- = 3.8141%
42.0010 6
Negative differential > forward premium . Hence, there is
a possibility of arbitrage inflow in India.
Arbitrage possibility for an investment of $1000 by taking
a loan @ 8% in US. An arbitrageur would invest in India
at spot rate of RS 42.0010 @12% for six months and
cover the principal +interest in six month forward rate
Principal:$1000= 42,001 Rs
Interest on investment for six month = Rs 42001 x
12/100 x 6/12 = 2520.06
So total amount at the end of six month+ principal +interest
= 2520.06+ 42001= 44,521.06
Converting the above in dollars at the forward rate =
44,521.06/42.8020= $1040.16
The arbitrageur will have to pay at the end of six month =
$ 1000 + ($1000 x 8/100 x6/100) = $1000+ $40 =1040$
5.
SOLUTION
Spot rate Bid price Ask price
Spot rate $0.2479 $0.2481
1 month $0.2482 $0.2486
3 months $0.2471 $0.2474
6 months $0.2466 $0.2471
For Frankfurt , New York and Paris all quotes for London all quotes
are indirect. If all above quotes were available at the same time and
assuming no transaction costs how might a trader take advantage of
the situation
SOLUTION
BID ASk
Or
¥22.6142/NP bid: ¥22.6346/MP ask
Purchase MP in Mexico at ¥ 22.6346/MP (ask)
Assuming ¥ 1 million as the starting amount &
converting it to MP. so, MP received = 1m /
22.6346= 42625.7 MP.
In Tokyo, = ¥28.8358/MP bid and ¥28.8725/MP ask,
convert MP into yen in Tokyo at ¥ 28.8358/MP bid.
Yen received = ¥1.229m
Premium = 4%
British Pound =1.5300-1.562/1.562 X 360/180 x 100
Discount = -4.08%
Japanese yen = 118.00-120.00/120.00 x360/180 x 100
Discount = -3.33%.
Swiss franc = 1.6200- 1.6000/1.6000 x 360/180 x 100
Premium = 2.5%
Honk kong dollar = 7.8000-8.000/8.000 x 360/180 x 100
Discount= -5%
ASSIGNMENT PROBLEMS
PROBLEM:1
Given the following date calculate the arbitrage
possibilities
Spot rate 1 $ = Rs 42.0010.
6 month forward rate 1$ = Rs 42.8020
Annualised interest rate on 6 month Rs:12 %
Annualised interest rate on 6 month USD:8%
Is arbitrage is possible.
PROBLEM:2
Given the following data:
Spot rate = 46.0010 Rs =1$
6 month forward rate Rs 46.8020 =1$
Annualised interest rate on 6 month Rs = 12%
Annualised interest rate on 6 month $ =8%
Initial investment is 10,000$
Calculate the arbitrage possibilities.
PROBLEM:3
USD/INR spot rate = 53.75/90. 2 month swap =.12/.20
USD/JPY spot rate = 110.50/125.45 . 2 month swap
=.20/.15
Find INR/JPY , 2 month outright
PROBLEM: 4
The current CHF/USD spot =0.6675. the following 90 day
call option on CHF is available.
Strike price Premium
0.60 0.075
0.65 0.03
0.68 0.01
0.70 0.005
0.75 0.002
Your view is that CHF is going to make strong up move
during the next 90 days your risk appetite is moderate .
What strategy is suitable for you/ explain with the pay off
table
EXOSURE :
TRANSLATION , TRANSACTION,
OPERTING
PROBLEM:
Farm product is the Canadian affiliate of a US
manufacturing company .its balance sheet in thousand
of Canadian $ for dollars for January, the January 1
20x2, exchange rate was C $ 1.6/$.
Farm product balance sheet (thousand of C$)
Assets Liabilities and networth
Cash =C$ 100000 Current liabilities =C $ 60,000
Account receivable = 220000 Long term debt = 160,000
Inventory = 320000 Capital stock =620000
Net plant and equipment = 200000 ----------------
--------------- total 8,40,000
Total 8,40,000
Determine farm product accounting exposure on
January 1 2012, using the current rate method/
monetary /non monetary method.
Calculate farm product contribution to its parent
accounting loss if the exchange rate on December
3 20x2 was C$ 1.8 per $. Assume all accounts
remain as they were at the beginning of the year.
SOLUTION
Current /non C$ Exchange Conversion to US$ on jan 1
current method rate 20x2
Assets
1. Account (100000/1.8)
receivable 100,000 1.8 = 55,555.55
2. cash 220,000 1.8 = 122,222.22
3. Inventory 320,000 1.8 = 1,77,777.77
4. Plant & 200,000 1.8 = 1,11,111.11
equipment --------------------
Liabilities = 4,66,666.66
1. Current 60,000 1.8 -------------------
liabilities = 33,333.33
2. Long term 160,000 1.8 = 88,888.88
debt = 3,87,500.00
3. Capital stock 620,000 1.6 = (43,055.55)
======== --------------------
CTA 840,000 4,66,666.66
As per current rate method
Accounting exposure on Jan 1 20x2 is as follows
Exposed asset = US$ 4,66,666.66.
Exposed liabilities = US $ 1,22, 222.22.
Accounting exposure = 3,44,444.45
Accounting loss as show as in CTA (Cumulative Translation
Adjustment) account is =US $ 43,055.55
NET PLANT & 6000 1.5 9000 RETAINED 4000 1.5 6000
EQUIPMENT EARNING
Assets
For the current /non current method the temporal method and the all current
rate method calculate .
a. The company’s exposed assets exposed liabilities and net exposed assets
under each accounting translation method
b. Suppose the euro depreciate by25% identify the impact of 25%
depreciation of the euro on new haven’s consolidation balance sheet under
each accounting translation method.
Value in Value at 1.50 (in
SOLUTION euro $)
Assets;
• Cash and short term 50,000 75000
securities
• Account receivable 30,000 45000
• Inventory 20,000 30000
• Plant and equipment 600,000 900,000
Total assets 700,000 1050000
Liabilities
• Account receivable 150000 2,25000
• Short term debt 60,000 90,000
• Long term debt 410000 615,000
• Net worth 80,000 120,000
Total liabilities & net 700,000 1050,000
worth
Deprecation = 25%
initial euro = 1.5$
that is 1 $ = .67 euro, Deprecation of 25% implies 1 $ =
1.25 x .67 euro =.83
which is same as 1 euro = 1.2 $.
All current method:
Expose assets: 8,40,000$
Expose liabilities : 744,000$
Net exposed assets: 96,000$
Current /non current method:
Expose assets : 120,000$
Expose liabilities: 252000$
Net exposed asset: =132,000$
Temporal method:
Exposed assets: 120,000$
Exposed liabilities: 744,000$
Net exposed assets: = -624,000$
Balance sheet In euro Ex C /non C ($) Ex. Tempora Ex. Cur. Rate
. rate l ($) rate ($)
rat
e
Assets:
• Cash & short (50,000x1.2) 1.2 60,000 1.2 60,000
term 50,000 1.2 60,000
securities. 1.2 36000 1.2 36000
• Account 30,000 1.2 36000
receivable 1.2 24000 1.2 24000
• Inventory 20,000 1.2 24000 1.5 900,000 1.2 720,000
• Plant & 600,00 1.5 900,000
equipment
Total asset 700,000 1020,000 1020,000 840,000
Liabilities
• Account 150,000 1.2 180000 1.2 180,000 1.2 180000
payable
• Short term 60,000 1.2 72000 1.2 72,000 1.2 72000
securities
• Long term
securities 410,000 1.5 615000 1.2 492,000 1.2 492000
• Net worth 80,000 1.5 120000 1.5 120,000 1.5 120000
Total liabilities 700,000 987000 864000 864000
In dollar term:
Functional currency = dollar (i.e. foreign currency so the
method used would be current rate method)
Net exposure = exposure asset – exposure liabilities.
Current method
Exposure assets = $ 1800 mn
Exposure liabilities = $ 940+ $700= $ 1640
Translation exposure = 1800-1640 = $ 160 mn
In pound term
Translation exposure = 1800- 1640 = $ 160 mn
Current rate = 1.8138/£
so translation exposure = 160/1.8138 = ₤ 88.21mn
b. The pound appreciation to $ 2.1122/£
Net exposure = ₤ 160 mn
Current rate = $ 2.1122/£
so translation exposure = 160/2.1122 = ₤ 75.75
Assets Liabilities
Cash $ 6000 Account payable $ 3500
Account receivable $ 4500 Short term bank loan $ 1500
Inventory $ 4500 Long term loan $ 4000
Net plant equipment $ 10,000 Capital stock $ 10,000
Total $ 25000 Retained earning $ 6000
Exchange rate for translating the balance sheet into
US $ are:
RS 35/$ : historic exchange rate , at which plant
and equipment long term loan and common stock
were acquired or issued.
RS 40/$ : march 31 exchange rate this was also the
rate at which inventory was acquired.
RS 42/$ April 1 exchange rate , after devaluation of
20%.
Assuming no change in balance sheet a/c between
march 31 and April 1 calculate accounting gain
/loss by the current rate method and by monetary /
non monetary method explain accounting loss in
term of change in the value of exposed accounts
SOLUTION
Exchange rate:
RS 35/$ historical rate for the others