Centre for Professional Education

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Foreign Exchange Exposure and Risk Management

Question No 1
Following are the quotes given by Banker at Mumbai. Identify the quotes as
direct or indirect quote. Also compute the direct for Indirect quote and vice
versa.

Direct/indirect Opposite Rate

1$= Rs.62.75
1£= Rs.95.75
1INR=Euro 0.0138
100 Indo Rupiah=Rs.0.58
1HK$=Rs.8.97

Question No 2
From a Japanese point of view, which of the following pair of quotes is the
direct quote? Which is the indirect quote?
a. JPY/GBP 210; GBP/JPY 0.004761.
b. JPY/USD 120; USD/JPY 0.008307.
c. JPY/CAD 104; CAD/JPY 0.009640.

Question No 3
From the following, find out Bid rate and offer rate. Also find out the spread
and express the spread in %.

Direct Quote Bid Offer Rate Spread Spread%

Rate
INR/$ 62.78-62.96
INR/Euro 76.58-76.97
INR/£ 97.00-97.25
INR/ HK$ 7.25-7.42

Question No 4 Application of bid and offer

Quotation Exposure Position Receivable /Payable

43.12-43.35 8500 Exporter
22.12-22.44 23000 Importer
11.12-11.33 15400 Exporter
41.87-41.93 11050 Exporter
45.82-46.02 18024 Importer
81.12-81.39 112500 Exporter

Question No 5
Find out the cross rates from the following:
a) Euro/£=2.5150 Euro/T=205.80 T/£=1=
b) $/£=1.5537-59 Euro/$=.1982-92 Euro/£=

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c) $/£=2.0015-30 $/SFr=0.6965-70 £/SFr=

d) HK$/INR=0.1656-70 INR/S$=23.9000-30 S$/ HK$=

Question No 6
(i) Rs. / £: 74.00-74.50 (ii) Rs. / CHF 26.00-26.60. Find CHF/£

Question No 7
Calculate how many rupees Shri Ras Bihar Ji Ltd., a New Delhi based firm, will
receive or pay for its following four foreign currency transactions :
(i) The firm receives dividend amounting to Euro 1, 12,000 from its French
Associate Company.
(ii) The firm pays interest amounting to 2, 00,000 yens for its borrowings
from Japanese Bank.
(iii) The firm exported goods to USA and has just received USD 3,
00,000.
(iv) The firm has imported goods from Singapore amounting to
Singapore Dollars (SGD) 4, 00,000.
Given: 1$ = Rs. 40.00/40.05 1Euro = Rs. 56.00/56.04
1 SGD = Rs. 24.98/25.00 100 Yens = Rs. 44.00/44.10

Question No 8
Calculate how many US$ a New York based firm will receive or pay for its
following four foreign currency transactions:
(i)The firm receives dividend amounting to Euro 1, 20,000 from its French
Associate company.
(ii) The firm pays interest amounting to 3, 00,000 yens for its
borrowings from Japanese Bank.
(iii) The firm exported goods to UK and has just received £3, 00,000.
(iv) The firm has imported goods from Singapore amounting to
Singapore Dollars (SGD) 4, 00,000.
Given: 1£ =$2.00/2.01
1 Euro = $ 1.20/1.21
1SGD = $ 0.49/0.50
100 yens = $ 0.89/0.90

Question No 9
Calculate how many USD a New York based firm will receive or pay for its
following four foreign currency transactions:
(i) The firm receives dividend amounting to Euro 1, 20,000 from its French
Associate Company.
(ii) The firm pays interest amounting to 2, 70,000 Yens for its borrowings
from Japanese Bank.
(iii) The firm exported good to UK and has just received £3, 00,000.
(iv) The firm has imported goods from Singapore amounting to
Singapore Dollars (SGD) 4, 00,000.
Given:
1$ = Euro 0.7937/0.8000
1$ = Yens 135/136

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1$ = pound 1.99/2.00
1$ = SGD 1.60/1.61

Question No 10
Day Quotes
1 1.6962/78
2 1.6990/1.7005
3 1.7027/42
a. On which day is it cheaper to buy US $ with respect to SF?
b. How many US $ do you need to buy 1000 SF on Day 1?
c. What is the spread on Day2?
d. If you exchanged $ 2500 for SF 4256.75 on which day. Did you
exchange? What transaction you made?

Question No 11
You are given the following $ Quotes:
Spot Rs. 40.50/40.60
2 months forward 0.10/0.20
3 months forward 0.20/0.10
4 months forward 0.25/0.30
(a) Calculate 2 months, 3 months and 4 months forward rates.
(b)What amount you will pay in rupees for purchasing 500,000 USD?
(c) How many Dollars you will sell to get Rs. 5, 00,000? ( You have enough
Dollars )
(d)Calculate % of discount / premium of Dollars on 3months and 4 months
forward rates. Assume (i) you are buying $ (ii) You are selling $.

Question No 12
The spot rate of Kuwaiti Dinar is Rs 159.24 and the three month forward rate is
Rs 162.72. Which currency is trading at a premium /discount? Determine
premium or discount (in %), of Dinar with relative to rupee. Also ascertain the
percentage premium or % discount of rupee relative to Dinar.

Question No 13
Calculate how many rupees a New Delhi based firm will receive or pay for its
following four foreign currency transactions:
(a) Purchasing $ 1,00,000 on 2 months forward basis
(b)Selling 70,000 Canadian Dollars on 3 months forward basis
(c) Purchasing 8, 25,000 Japanese Yens on 1 months forward basis.
Spot 1 month 2 month 3 month
forward forward forward
1$ Rs. 40.00/40.10 5/6 P 11/10P 10/11 P
1 CD Rs.34.90/35.00 0.10/0.20 0.11/0.12 0.10/0.11
100 Yens Rs. 33.00/33.10 0.11/0.10 0.12/0.13 0.14/0.15

Question No 14
A Ltd requested its Banker to issue a demand draft for $10000, spot. The
Banker quoted the following INR/ $ 44.3575-44.3825. It is normal for the

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Banker to Charge 0.15% for exchange margin for all foreign currency
transactions. Find out
a. How much the company should pay?
b. In case the company had 15000$ for conversion to INR, how much the
company realize?
c. If the demand draft referred to in (a) were to be cancelled a week later
by the company and the rate is INR/$ 44.3225-44.3991, how much the
company will be realizing from the banker. Cancellation charge of Rs.250
will be taken.

Question No 15
The following rate appears in the foreign exchange market:
Spot rate 2 Month Forward

Rs. /US$ Rs. 45.80/46.05 Rs. 46.50/47.00

a. How many dollars should a firm sell to get Rs.5 Crore after 2 months?
b. How many rupees is the firm required to pay to obtain US $ 2, 00,000 in
the spot market?
c. Assume the firm has US $ 50,000. How many rupees does the firm
obtain in exchange of US $?

Question No 16
The exchange rate for Mexican peso was 0.1086 in December 2004 and
0.0913 in November 2004, against dollar. Which currency has depreciated and
by how much?

Question No 17
In 1999, the euro was trading at $0.90 per euro. If the euro is now trading at
$1.16 per euro, what is the percentage change in the euros’ value? Is this an
appreciation or depreciation?

Question No 18
A television in US is costing $500. The same television is costing € 725 in
Germany. What is the spot rate between euro and dollar?

Question No 19
In Australia cricket bats sell for AUD 40 while in India they sell for only Rs
1000.
1. According to the theory of PPP, what should be the Rs /AS rate?
2. If the price of cricket bats in the Australia goes up to A$ 44 each in one year
and the
Price of cricket bats in India goes up to Rs 1074 each, what is the one year
forward Rs/A$ rate?

Question No 20

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In year 2006 a Watch costs $22.84 in New York, S$ 69 in Singapore and 3240
Rubles in Moscow.
a. If the law of one price held, what was the exchange rate between US $
and Singapore? Between US $ and Rubles?
b. The actual exchange rates in 2006 were S$1.63 = us$ 1 and 250
rubles=US$1.Where would you prefer to buy your Watch?

Question No 21
Determine if there is a spot arbitrage opportunity among each of the following
two sets of spot rates. Next, show how an investor can take advantage of it, if
there is one. Assume that the dollar is your home currency.
a. $ /Pound = $ 1.65
b. $ /DM = $0.554
c. DM/Pound = DM 3

Question No 22
It is given that Dollar 6-month T-bills = 7%; Risk –free 6-month Japanese bonds
=5.5%; Spot exchange rate is 1 yen = $0.009, what is the 6-month forward
exchange rate?

Question No 23
The United States Dollar is selling in India at Rs 45.50. If the interest rate for 6
months borrowing in India is 8% per annum and the corresponding rate in USA
is 2%.
a. Do you expect United States Dollar to be at a premium or at discount in
the Indian forward market;
b. What is the expected 6-months forward rate for United States Dollar in
India ; and
c. What is the rate of forward premium or discount?

Question No 24
Given Spot Exchange rate $1=FF 7.05. Complete missing entries.

3 Month 6 months 1 year

$ Int Rate (Annual) 11.5% 12.25% E
FF Int. Rate (Annual) 19.5% C 20%
Forward Franc per $ A D 7.52
Forward Dollar Premium % B 6.3% F
Question No 25
The annual interest rate is 5% in the United States and 8% in the UK. The spot
exchange rate is 1.50 and forward exchange rate, with one year maturity, is

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£/$=1.48. In view of the fact that the arbitrager can borrow $ 1000000 at
current spot rate, what would be the Arbitrageur profit/loss?

Question No 26
Here are some of the prices in the international money markets:
Spot rate = $0.95/€
Forward rate (one year) = $0.97/€
Interest rate (€) – Germany = 7% per year
Interest rate ($) – US = 9% per year
1. Assuming no transaction costs or taxes exist, do covered arbitrage
profits exist in the above situation? Assume parity does not exist and only
explain the flows.
2. Suppose now that transaction costs in the foreign exchange market
equal 0.25% per transaction. Do unexploited covered arbitrage profit
opportunities still exist?
3. Suppose no transaction costs exist. Let the capital gains tax on currency
profits equal 25%, and the ordinary income tax on interest income equal 50%.
In this situation, do covered arbitrage profits exist? How large are they?
Describe the transactions required to exploit these profits.

Question No 27
Is covered interest arbitrage possible in the following situation? If so where to
invest? How much shall be the gain?
a) Spot can$ 1.317/$. Forward 6 months 1.2950 Can $/$. US$: 10%;
Can$:6%
b) Spot 100 yen = Rs. 35.002; Forward 6 months Rs 35.9010 INR 12%; Yen
7%

Question No 28
Following are the spot exchange rates quoted in three different forex markets:
USD / INR 48.30 in Mumbai
GBP/ INR 77.52 in London
GBP / USD 1.6231 in New York
The arbitrageur has USD 1, 00, 00,000. Assuming that there are no transaction
costs, explain whether there is any arbitrage gain possible from the quoted
spot exchange rates.

Question No 29
Given the following information:
Exchange rate: Canadian Dollar 0.665 per DM (spot)
Canadian Dollar 0.670 per DM (3 Months)
Interest rates: DM -- 7% p.a
Canadian Dollar -- 9% p.a

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What operations would be carried out to take the possible arbitrage gains?

Question No 30
An Indian firm imports leather goods from a US firm, invoice $ 1, 02,000, credit
terms 3 months. The importer firm is anticipating rise in Dollar rate. Suggest
the plan for hedging the foreign exchange risk, using the data given below:

Spot rate: 1$ = RS. 45.00 / 45.10

3 months forward rate : 1$ = Rs. 45.50 / 45.60
Interest rates: Rs. $
12% 8%

Question 31
ABC Co. has taken a 6 month loan from their foreign collaborators for US
Dollars 2 million. Interest payable on maturity is at LIBOR plus 1.0%.
Current 6-month LIBOR is 2%. Enquiries regarding exchange rates with
their bank elicits the following information: Spot USD 1 Rs. 48.5275
6 months forward Rs.48.4575
(i) What would be their total commitment in Rupees, if they enter into a
forward contract?
(ii) Will you advise them to do so? Explain giving reasons.

Question No 32
An Indian firm is to receive $ 1, 00,000 after one year. It wants to cover its
exposure using MMH for which it has collected the following data:
Interest rate in India 10%
Interest rate in US 5%
Spot exchange rate Rs/$ 40
a) Calculate the rupee realization after one year if the exposure is hedged
using MMH
b) Compare MMH with forward and say which is best if
a. One year forward is $1 = Rs 43
b. One year forward is $1 = Rs 39
c. One year forward is theoretical forward as per IRP

Question No 33
An Indian firm has imported goods worth $ 1, 00,000 for which payment is to
be made after one year. It wants to cover its exposure using MMH for which it
has collected the following data:
Interest rate in India 10%
Interest rate in US 5%
Spot exchange rate Rs/$ 40

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a) Calculate the rupee outflow after one year if the exposure is hedged
using MMH
b) Compare MMH with forward and say which is best if
a. One year forward is $1 = Rs 43
b. One year forward is $1 = Rs 39
c. One year forward is theoretical forward as per IRP
Question 34
JKL Ltd., an Indian company has an export exposure of JPY 10,000,000
payable August 31, 2014. Japanese Yen (JPY) is not directly quoted against
Indian Rupee.
The current spot rates are:
INR/US $ = Rs. 62.22
JPY/US$ = JPY 102.34
It is estimated that Japanese Yen will depreciate to 124 level and Indian
Rupee to depreciate against US $ to Rs. 65.
Forward rates for August 2014 are
INR/US $ = Rs. 66.50
JPY/US$ = JPY 110.35
Required:
(i) Calculate the expected loss, if the hedging is not done. How the
position will change, if the firm takes forward cover?
(ii) If the spot rates on August 31, 2014
are: INR/US $= Rs. 66.25
JPY/US$ = JPY 110.85
Is the decision to take forward cover justified?

Question No 35
The finance director of P Ltd. has been studying exchange rates and interest
rates relevant to India and USA. P Ltd. has purchased goods from the US Co. at
a cost of $ 51 Lakhs, payable in dollars in three months’ time. In order to
maintain profit margins, the finance director wishes to adopt, if possible, a
risk-free strategy that will ensure that the cost of the goods to P Ltd. is no
more than Rs.22 crores.
Exchange rates Rs / Dollar
Spot 40 - 42 3 months forward 42 - 45
Interest rates (available to P Ltd.)

India US
Deposit rate (°/o) Borrowing rate Deposit rate Borrowing rate
(%) (%) (%)
13.00 16.00 8.00 11.00
Calculate whether it is possible for P Ltd. to achieve a cost directly associated
with transaction of no more than Rs.22 crores by means of a forward market
hedge, or money market hedge. Transactions costs may be ignored.

Question No 36

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An Indian firm has imported a machine from USA; the invoice is $ 1, 00,000.
The payment is to be made in 2 months’ time. The USD rates are quoted in the
market as follows:
Spot 1$ = Rs.45.00 / 45.05
2 months forward 1$ = Rs. 45.30 / 45.36
The importer firm is considering the ‘leading’. It can borrow rupees in India at
the rate of 9% p.a. (a) Opine. (b) Will your opinion change if the exporter
allows a discount of 1% on immediate payment?

Question No 37
An Indian firm has imported a machine from USA; the invoice is $ 1, 00,000.
The payment is to be made in 2 months’ time. The USD rates are quoted in the
market as follows:
2 months forward 1$ = Rs. 45.30/45.36
3 months forward 1$ = Rs. 44.80/44.85
The importer-firm is considering the ‘lagging’. The exporter-firm will charge
interest at the rate of 9% p.a. if the payment is delayed after it becomes due.
Your cost of capital is 12%. Opine.

Question No 38
An Indian firm is to receive $100000 after one year. It wants to cover its
exposure using MMH for which it has collected the following data:
Domestic rupee interest rate 10%-12%
Euro rupee interest rate 11%-13%
Domestic dollar rate 5%-8%
Euro dollar rate 6%-9%
Spot exchange rate Rs/$ 40-42
 Calculate the rupee realisation after one year if the exposure is hedged
using leading and MMH
 Which strategy is best leading or MMH

Question No 39
An Indian firm has imported goods worth $100000 for which the payment is to
be made after one year. It wants to cover its exposure using MMH for which it
has collected the following data:

Domestic rupee interest rate 10%-12%

Euro rupee interest rate 11%-13%
Domestic dollar rate 5%-8%  C
Euro dollar rate 6%-9% al
Spot exchange rate Rs/$ 40-42 cu
lat
e the rupee payment after one year if the exposure is hedged using
leading and MMH
 Which strategy is best leading or MMH

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Question 40
Z Ltd. importing goods worth USD 2 million requires 90 days to make the
payment. The overseas supplier has offered a 60 days interest free credit
period and for additional credit for 30 days and interest of 8% per annum.
The bankers of Z Ltd offer a 30 days loan at 10% per annum and their
quote for foreign exchange is as follows:

Rs.
Spot 1 USD 56.50
60 days forward for 1 USD 57.10
90 days forward for 1 USD 57.50
You are required to evaluate the following options:

(I) Pay the supplier in 60 days, or

(II) Avail the supplier's offer of 90 days credit.
Question 41
XYZ Ltd. is an export oriented business house based in Mumbai. The
Company invoices in customers’ currency. Its receipt of US $ 1, 00,000 is
due on September 1, 2009.

Market information as at June 1, 2009 is:

Exchange Rates Currency

Futures
US $/Rs. US $/ Rs. Contract Rs,4,72,000
size
Spot 0.02140 June 0.02126
1 Month Forward 0.02136 September 0.02118
3 Months Forward 0.02127
Initial Margin Interest Rates in India
June Rs. 10,000 7.50%
September Rs. 15,000 8.00%
On September 1, 2009 the spot rate US $Re. is 0.02133 and currency
future rate is 0.02134. Comment which of the following methods would be
most advantageous for XYZ Ltd.
(a) Using forward contract
(b) Using currency futures
(c) Not hedging currency risks.
It may be assumed that variation in margin would be settled on the maturity of
the futures contract.

Question No 42

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The Woolworth Corporation's USA is committed to the following transactions in

90 days:
 Make interest payment to French bank of FFr 100
 Receive DEM 160 for goods sold to German retailer in 180 days
 Receives FFr 100 in payment for sales to a French manufacturer.
 Make DEM 160 payment to German supplier for product.
The spot exchange rate today is DEM 1.6000/$. Other foreign exchange and
interest rate data are:
• 90-day forward DM 1.6300
• 180-day forward DM 1.6500
• 90-day interest rate DEM 9.5% p.a.
• 180-day interest rate DEM 8.25% p.a.
• 90-day interest rate USD 2.0% p.a.
• 180-day interest rate USD 2.5% p.a.
Demonstrate how the US Company can achieve certainty of value for its future
payables and receivables.

Disposal of forwards by Banks

Question No 43
An Indian company enters into a forward agreement with a bank on 17 th
January for purchasing 1 lakh US dollars. As on that date the forex situation
was as follows:
Spot INR/$ 46.5400/5450
31 Jan
st
775/825
28 feb
th
2350/2425
30 March
th
4000/4100
On 15 February the company comes to know that it has to make early
th

payment for this on 28th February and not on 30th March. The current rates on
15th February transaction date are :
Spot INR/$ 46.5025/5075
28 feb
th
650/700
30 march
th
2225/2275
27 April
th
3900/4000
What are the charges payables by the company?

Question No 44
An Indian company enters into a forward agreement with a Bank on 19 th
January for selling 1.75 lakh US Dollars. As on that date the forex situation was
as follows:

Spot INR / $ : 46.5400/5450

31st Jan 775 / 825
28th Feb 2350 / 2425
30th Mar 4000 / 4100

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On 15th February, the company comes to know that it has to receive early
remittance on 28th Feb and not on 30th March. The current rates on 15 th
February transaction date are:
Spot INR / $ : 46.5025 / 5075
28th Feb 650/ 700
30th Mar 2225 / 2275
27th Apr 3900 / 4000
What are the charges receivable/payable by the company?

Question No 45
The company had agreed on 20th February that it will buy on 20th April from
the banker USD 10,000 at Rs.44.57. On 20th March, the company approaches
the bank to buy USD 10,000 under the forward contract earlier entered into.
The rates prevailing in the market on this date are:
Spot Rs.44.4725/4800
April Rs.44.2550/2625
Ignoring interest and find out the amount that would be paid/received by the
company on early delivery?

Question No 46
A company entered into an agreement with its banker on 15th March, for a
forward sale contract for DEM 4,000 delivery 1st July, at the rate of Rs.28.14
per Mark. On 15th April, the company requested the bank to sell the 'bill for
DEM 4,000 under this contract. Calculate the amount payable/receivable to
the company assuming the following rates on 15th April:

Spot DEM 1 = Rs.28.1025/ 1075

Deliver July 28.6475 / 6550
Ignore interest and the penal provisions under FEDAI rules.

Question No 47
An Indian company enters into a forward agreement with a Bank on 17th
January for purchasing 1 lakh US Dollars. As on that date the forex situation
was as follows:
Spot USD/INR 46.5400/ 5450
31 Jan
st
775 / 825
28th Feb 2350 / 2425
30th Mar 4000/4100
On 15th February, the company comes to know that it has to settle its payable
on 30th March and not on 28th February. The current rates on 15th February
transaction date are:
Spot INR/ $ 46.5025/ 5075
28 Feb
th
650 / 700
30th Mar 2225 / 2275
27th Apr 3900 / 4000

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What are the charges payables by the company'?

Question No 48
On 15th March, K Ltd entered into a forward sale contract for US dollars 5,000
with its banker at the rate of Rs.45.05 delivery due on 15th June. On 5th May,
the company requests the bank to postpone the date to 15th July. Calculate
the extension charges payable to the banker assuming the following rates in
the market on 5th May.
Spot USD 1 = Rs.45.00 / 02
For / June mid 45.04/ 06
For / July mid 45.04/ 10
For / Aug mid 45.1 / 14

Question No 49
An importer bought USD 1, 00,000 3 months forward on December 29 at a
contract rate of Rs.44.50, delivery March 29. On March 29, the importer
requests the bank to extend the contract to April 29.
On March 29 the market rates are:
INR/USD Spot: 44.80/45.05 1-month swaps: 10/12.
Calculate the charges payable / receivable to the banker.

Question No 50
Gayle Company Ltd had booked a forward sale contract for USD 2, 00,000 at
Rs.45.22 a bill for collection. However, on the maturity date the company
requested to extend contract by one month:
Assuming the on-going market rates for US dollars are as under:
Spot USD 1 = Rs.45.1925 / 2575
One month forward 600/ 700
Two month forward 900 / 1000
Three month forward 1200/ 1300
What will be the extension charges payable/receivable by the company?

Question No 51
On September 15 the Rs/$ rates were 41.15/41.40 spot and 82/95 3 month
swap points. A firm booked a 3 month forward purchase contract for $150,000.
On November 15 it wished to cancel the contract. At that time, the spot rate
was 41.90/42.10 and one month swap rate was 20/30. How much is collectable
or payable by customer.

Question No 52
A customer with whom the bank had entered into a 3 months forward
purchase contract for Sw.Fcs. 10,000 at the rate of Rs.27.25 comes to the
bank after two months and requests cancellation of the contract. On this date,
the rates and prevailing are:

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Spot Sw.Fcs 1 = Rs.27.30 - 27.35

1 month forward 27.45 - 27.52
What is the loss/gain to the customer on cancellation?

Question No 53
On 15th January a company booked a forward purchase contract for French
Francs 250000 from a banker, delivery 15th February at Rs.8.95. On the due
date the customer requests cancellation of the contract.
Assuming French Francs were quoted in the London foreign exchange market as
under:
Spot USD 1 = FFR 5.0200 / 0300
One month 305 / 325
Two month 710 / 760
And the US dollars were quoted in the local exchange market as under on the
date of cancellation:
Spot USD = 1 Rs.44.7900 / 7975
Spot / March 30/35
Spot April 60 / 65
What will be the charges payable by the company, if any or otherwise?

Question No 54
FX Ltd had booked a forward sale contract for Deutsche Mark 50,000 delivery
20th November at Rs.28.95. The company on the due date requested
cancellation of forward exchange contract.
Assuming Deutsche Marks were quoted in the Frankfurt market as under:
Spot USD = 1 DEM 1.5150/ 5170
One month forward 125/115
Two month forward 280 / 270
And the US dollars were quoted in the local market as under:
Spot USD = 1 Rs.44.6125 / 6200
Spot / December 34/36
What will be the cancellation charges, if any, payable or receivable by FX Ltd?

Question No 55
You as a dealer have the following position in pound-sterling:

Opening balance in Barclays Bank International London GBP 20,000 OD

Opening currency position overbought 5,000
Purchased a telegraphic Transfer 50,000
Issued a draft on London 20,000
TT Remittance Outward 25,000
Purchased Bills on London 75,000
Forward sales 75,000

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Export bills realized 45,000

What steps would you take if you are required to maintain a credit balance of
GBP 10,000 in Nostro account and square your exchange position?
Question 56
Suppose you are a dealer of ABC Bank and on 20.10.2014 you found that
your Nostro account with XYZ Bank in London is overdrawn by £65,000 and
you had overbought £35,000. During the day following transaction has taken
place:
£
DD purchased 12,500
Purchased a Bill on London 40,000
Sold forward TT 30,000
Forward purchase contract cancelled 15,000
Remitted by TT 37,500
Draft on London cancelled 15,000
What steps you would take, if you are required to maintain a credit Balance
of £15,000 in the Nostro A /c and keep as overbought position on £7,500?

Question No 57
On December 27, a customer requested a bank to remit DQ-250000 to Holland
in payment of import of diamonds under an irrevocable LC. However due to
bank strikes, the bank could effect the remittance only on January 3. The
market rates were as follows:

December 27 January 3
Bombay $ / 100 Rs. : 3.10 - 3 . 1 5 3.07 - 3.12
London $ / Pound : 1 . 7 2 5 0 / 60 1.7175 / 85
DG / Pound 3 . 9 5 7 5 / 90 3.9380 / 90
The bank wishes to retain an exchange margin of 0.125%. How much does the
customer stand to gain or lose due to the delay?

Question No 58
On January 28, a customer requested a bank to realise Singapore $2.5 Million
in receipt under an irrevocable LC for their exports through Singapore corridor.
However due to bank strikes, the bank could complete the formalities only on
February 4, the market rates were as follows:
Jan 28 Feb 4
Bombay INR/$ 45.84/ 90 45.91 / 97
London $ / Pound 1 . 7 8 4 0 / 50 1 . 7 7 6 5 / 75
Singapore $ / Pound 3.1575 / 90 3 . 1 3 8 0 / 90
The bank wishes to consider an exchange margin of 0.125%. How much does
the customer stand to gain or lose due to the delay? Computational rates can
be extended up to 4 decimal locations.

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Question No 59
M/s Omega Electronics Ltd exports air-conditioners to Germany by importing
the components from Singapore. The company is exporting 2400 units at a
price of Euro 500 per unit. The cost of imported components is S$ 800 per
unit. The fixed cost and other variable cost per unit are Rs. 1000 and Rs. 1500
respectively. The cash-flows in foreign currencies are due in six months.
The current exchange rates are as follows:
Rs. /Euro 51.50/55
Rs. /S$ 27.20/25
After six months the exchange rates turn out as follows:
Rs. /Euro 52.00/05
Rs. /S$ 27.70/75
(1) You are to calculate the gain/loss due to transaction exposure.
(2) Based on the following additional information calculate the loss/gain due to
transaction and operating exposure if the contracted price of the air
conditioner is Rs. 25,000:
(i) The current exchange rate is: Rs. /Euro 51.75/80
Rs. /S$ 27.10/15
(ii) Price elasticity of demand is estimated to be 1.5.
(ii) Payments and receipts are to be settled in six months.

Question No 60
T Ltd, a group of companies controlled from UK includes subsidiaries in India,
Malaysia, and US. As per the CFO's forecast that, at the end of the June 2010
the position of the intercompany indebtedness will be as follows:
1. Indian subsidiary will be owed Rs. 14438100 by the Malaysian subsidiary
and will to owe the US subsidiary $106007.
2. The Malaysian subsidiary will be owed MYR 1443800 by the US subsidiary
and will o_werf$80000.
Suppose you are the head of central treasury department of the group and you
are required to net off intercompany balances as far as possible and to issued
instructions for settlement of the net balances.
Question 61
Following information relates to AKC Ltd. which manufactures some parts
of an electronics device which are exported to USA, Japan and Europe on
90 days credit terms.
Cost and Sales information:
Japan USA Europe
Variable cost per unit Rs.225 Rs.395 Rs.510
Export sale price per unit Yen 650 US$10.23 Euro 11.99
Receipts from sale due in 90 Yen 78,00,000 US$1,02,300 Euro 95,920
days
Foreign exchange rate information:

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Yen/ Rs. US$/ Rs. Euro/ Rs.

Spot market 2.417-2.437 0.0214-0.0217 0.0177-0.0180
3 months forward 2.397-2.427 0.0213-0.0216 0.0176-0.0178
3 months spot 2.423-2.459 0.02144-0.02156 0.0177-0.0179
Advice AKC Ltd. by calculating average contribution to sales ratio whether
it should hedge its foreign currency risk or not.

Question 62
An American firm is under obligation to pay interests of Can$ 1010000 and
Can$ 705000 on 31st July and 30th September respectively. The Firm is risk
averse and its policy is to hedge the risks involved in all foreign currency
transactions. The Finance Manager of the firm is thinking of hedging the risk
considering two methods i.e. fixed forward or option contracts.
It is now June 30. Following quotations regarding rates of exchange, US$
per Can$, from the firm’s bank were obtained:

Spot 1 Month 3 Months

Forward Forward
0.9284-0.9288 0.9301 0.9356
Price for a Can$ /US$ option on a U.S. stock exchange (cents per Can$,
payable on purchase of the option, contract size Can$ 50000) are as
follows:

Strike Calls Puts

Price
(US$/Can$) July Sept. July Sept.
0.93 1.56 2.56 0.88 1.75
0.94 1.02 NA NA NA
0.95 0.65 1.64 1.92 2.34
According to the suggestion of finance manager if options are to be used,
one month option should be bought at a strike price of 94 cents and three
month option at a strike price of 95 cents and for the remainder uncovered
by the options the firm would bear the risk itself. For this, it would use
forward rate as the best estimate of spot. Transaction costs are ignored.
Recommend, which of the above two methods would be appropriate for
the American firm to hedge its foreign exchange risk on the two interest
payments.
Question 63
Zaz plc, a UK Company is in the process of negotiating an order amounting
€2.8 million with a large German retailer on 6 month’s credit. If successful,
this will be first time for Zaz has exported goods into the highly competitive
German Market. The Zaz is considering following 3 alternatives for
managing the transaction risk before the order is finalized.
(a) Mr. Peter the Marketing head has suggested that in order to
remove transaction risk completely Zaz should invoice the German
firm in Sterling using the current €/£ average spot rate to calculate

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the invoice amount.

(b) Mr. Wilson, CE is doubtful about Mr. Peter’s proposal and
suggested an alternative of invoicing the German firm in € and
using a forward exchange contract to hedge the transaction risk.
(c) Ms. Karen, CFO is agreed with the proposal of Mr. Wilson to invoice
the German first in
€, but she is of opinion that Zaz should use sufficient 6 month sterling
further contracts (to the nearest whole number) to hedge the transaction
risk.

Following data is available

Sport Rate € 1.1960 - €1.1970/£
6 months forward premium 0.60 – 0.55 Euro Cents.
6 month further contract is € 1.1943/£
currently trading at
6 month future contract size is £62,500
After 6 month Spot rate and € 1.1873/£
future rate
You are required to
(a) Calculate (to the nearest £) the £ receipt for Zaz plc, under each of
3 above proposals.
(b) In your opinion which alternative you consider to be most
appropriate.
Question 64
A bank enters into a forward purchase TT covering an export bill for Swiss
Francs 1, 00,000 at Rs. 32.4000 due 25th April and covered itself for same
delivery in the local interbank market at Rs. 32.4200. However, on 25 th March,
exporter sought for cancellation of the contract as the tenor of the bill is
changed.
In Singapore market, Swiss Francs were quoted against dollars as under:
Spot USD 1 = Sw. Fcs. 1.5076/1.5120
One month forward 1.5150/ 1.5160
Two months forward 1.5250 / 1.5270
Three months forward 1.5415/ 1.5445 and
in the interbank market US dollars were quoted as under:
Spot USD 1 = Rs.49.4302/.4455
Spot / April .4100/.4200
Spot/May .4300/.4400
Spot/June .4500/.4600
Calculate the cancellation charges, payable by the customer if exchange
margin required by the bank is 0.10% on buying and selling.

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