Forex

Forex

Sanjay Sir Speaks “Gone are the days when SFM used to be a mix of plain vanilla topics like Capital Budgeting (Old machine vs New machine), Leasing and theory. During that era, any person with a Accounts and Cost background background could have successfully taught SFM. There has been a radical shift in SFM towards exotic topics like Risk Management, Derivatives, Foreign Exchange, Portfolio Management, etc. Even in this term i.e. Nov’13 Nov’13,, we had around 22 marks from FOREX alone. Results therefore have been pathetic even in metro cities like Delhi and Mumbai. This is an era of specialization. Perfection over this subject now requires guidance from someone someone equipped in Statistics, Economics and ofcourse, hard core Finance. This book and the accompanying Youtube videos are an earnest ear nest attempt to expose you to the efficient style of SFM teaching.”

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Sanjay Saraf Educaonal Instute Private Limited

Page # 25 Question No. 6

1.

You sold Hong Kong Dollar 1,00,00,000 value spot to your customer at ` 5.70 and covered yoursel in London market on the same day, when the exchange rates were US$ 1

=

H.K.$

73880

7.5920

=

`

42.70

42.85

Local inter bank market rates or US$ were

Spot USS 1

Calculate cover rate and ascertain the profit or loss in the transaction ignore brokerage. HINTS Cover rate = 5.8 per HK$, Loss = ` 1000000


2.

On January 28, 2005 an importer customer requested a bank to remit Singapore Dollar (SGD) 25,00,000 under an irrevocable LC. However due to bank strikes, the bank could effect the remittance only on February 4, 2005. Te inter bank market rates were as ollow : Bombay

US$1

=

January 28 ` 45.85/45.90

February 4 45.91/45.97

London

Pound I

=

US$17840/17850

1.7765/1.7775

Pound I

=

SGD3.1575/3.1590 3.1380/3.1390

Te bank wishes to retain an exchange margin o 0.125%. How much does the customer stand to gain or lose due to the delay ? (Calculate rate in multiples o .000 1) HINTS Loss = ` 228250

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3.

Te ollowing 2-way quotes appear in the oreign exchange market : RS/US $

Spot

2-months orward

` 46.00/ ` 46.25

` 47.00/ ` 47.50

Required : (i) How many US dollars should a firm sell to get ` 25 lakhs afer 2 months? (ii) How many Rupees is the firm required to pay to obtain US $ 2,00,000 in the spot market? (iii) Assume the firm has US $ 69,000 in current account earning no interest. ROI on Rupee investment is 10% p.a. Should the firm encash the US $ now or 2 months later? HINTS (i) $ 53191.49 (ii) ` 9250000 (iii) inflow US $ Now = ` 3226900, 2 months later = ` 3243000 (Better)


4.

A company is considering hedging its oreign exchange risk. It has made a purchase on 1st January, 2008 or which it has to make a payment o US $ 50,000 on September 30, 2008. Te present exchange rate is 1 US $ = ` 40. It can purchase orward 1 US $ at ` 39. Te company will have to make a upront premium o 2% o the orward amount purchased. Te cost o unds to the company is 10% per annum and the rate o Corporate tax is 50%. Ignore taxation. Consider the ollowing situations and compute the Profit/Loss the company will make i it hedges its oreign exchange risk : (i) I the exchange rate on September 30, 2008 is ` 42 per US $. (ii) I the exchange rate on September 30, 2008 is ` 38 Per US $. HINTS Profit = ` 108075, Loss = ` 91925


5.

On 1st March, 2008, A Inc, a US company bought certain products rom apland. Te currency o apland is apa. Te price agreed was apa

2 | © 2014 Sanjay Sara Educational Institute Pvt Ltd. Contact No. 9831092413

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900000 payable on 31st May, 2008. Te spot price on 1st March, 2008 was 10 apa per US $. Te expected uture spot rate was 8 apa per US $; and the 3-months orward rate is 9 apa per US$. Te US and apland annual interest rate are 12% and 8% respectively. Te tax rate or both countries is 40%. A Inc., is considering three alternatives to deal with the risk o exchange rate fluctuations. (a) o enter the orward market to buy apa 9,00,000 at 3 months orward rate. (b) o borrow appropriate amount in $ to buy apa at current spot rate and to invest the apa purchased or 3 months. (c) o wait untill May 31, 2008, and buy apas at whatever spot rate prevailing at that time. Which alternative the A Inc. should ollow in order to minimize its cost o uture payment o apas. HINTS (a) O/F = $ 1,00,000 (b) O/F = $ 90533.60 (c) $ 112500 Option (b) should be chosen


6.

At the end o August, 2008, an Indian company, an exporter has an export exposure o 5,00,000 H.K.$ due at the end o September, 2008. HK $ is not directly quoted against India rupee. Te current spot rates are INR/USD = ` 46 and HK$/USD = HK$2.3. It is estimated that HK$ will depreciate to HK $2.5 level and Indian Rupee to depreciate against US$ to ` 47. One month orward rate at the end o August are HK$/USD = HK$ 2.45 and INR/USD = ` 47.04. (i) Calculate expected loss i hedging is not done. How the position will change with the company taking a orward cover? (ii) I spot rate on 30the September, 2008 are eventually HK$/USD = HK$ 2.52 and INR/USD = 47.88 is the decision to take orward cover justified. HINTS (i) ` 4,00,000 - Under realization (ii) Spot rate = ` 19 / HK $, so forward cover justified

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7.

Arnie operating a garment store in US has imported garments rom Indian exporter o invoice amount o ` 1,38,00,000 (equivalent to US$ 3,00,000). Te amount is payable in 3 months. It is expected that the exchange rate will decline by 5% over 3 months period. Arnie is interested to take appropriate action in oreign exchange market. Te three month orward rate is quoted at ` 44.50. You are required to calculate expected loss which Arnie would suffer due to this decline i risk is not hedged. I there is loss, then how he can hedge this risk. HINTS Expected Loss (without hedge) = $ 15789.47 Savings due forward cover = $ 5677.11


8.

Given 3m – $1.2625/EURO Annualized orward rate discount on EURO based on this 3m rate is 6%. Find out the spot rate. HINTS Spot Rate (S) = 1.2817 S = $ 1.2817/ €


9.

Given 3m – $1.0450/EURO Annualized orward rate discount on $ against EURO based on this 3m rate is 6%. Also annualized orward rate discount on EURO against $ based on this 6m rate is 8%. Find out 6m. HINTS 6 month Forward Rate = 8% $ 0.9881


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10.

Given : Spot Rate – ` 48/$ 3m – ` 48.6/$ Calculate annualized orward premium on $ & on ` HINTS Annualised Forward Premium On $ = 5%,Annualised Forward Premium on ` = 4.94% AP on $ = 5%, AP on ` = –4.94% (discount)


11.

An automobile company in Gujarat exports its goods to Singapore at a price o SG$ 500 per unit. Te company also imports components rom Italy and the cost o components or each unit is € 200. Te company’s CEO executed an agreement or the supply o 20000 units on January 01, 2010 and on the same date paid or the imported components. Te company’s variable cost o producing per unit is ` 1,250 and the allocable fixed costs o the company are ` 1,00,00,000. Te exchange rates as on 1 January 2010 were as ollows ` /SG$ Spot 33.00/33.04 56.49/56.56 ` /€ Mr. A, the treasury manager o company is observing the movements o exchange rates on a day to day basis and has expected that the rupee would appreciate against SG$ and would depreciate against i. As per his estimates the ollowing are expected rates or 30th June 2010. ` /SG$ Spot 32.15/32.21 ` /€ 57.27/57.32 You are required to find out : (a) Te change in profitability due to transaction exposure or the contract entered into. (b) How many units should the company increases its sales in order to maintain the current profit level or the proposed contract in the end o June 2010. HINTS (a) ` 115.4 lakhs (b) 23434 units

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12.

Followings are the spot exchange rates quoted at three different orex markets : USD/INR

48.30 in Mumbai

GBP/INR GBP/USD

77.52 in London 1.6231 in New York

Te arbitrageur has USD 1,00,00,000. Assuming that there are no transaction costs, explain whether there is any arbitrage gain possible rom the quoted spot exchange rates. HINTS Loss = $ 111006


13.

You have ollowing quotes rom Bank A and Bank B : SPO

Bank A USD/CHF 1.4650/55

3 months

5/10

6 months

10/15

SPO

GBP/USD 1.7645/60

3 months

25/20

6 months

35/25

Bank B USD/CHF 1.4653/60

GBP/USD 1.7640/50

Calculate : (i) How much minimum CHF amount you have to pay or 1 million GBP spot? (ii) Considering the quotes rom Bank A only, or GBP/CHF what are the Implied Swap points or Spot over 3 months? HINTS (i) CHF = 2.5866 million (ii) (28/12)


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14.

Your orex dealer had entered into a cross currency deal and had sold US $ 10,00,000 against EURO at US $ 1 = EUR 1.4400 or spot delivery. However, later during the day, the market became volatile and the dealer in compliance with his management’s guidelines had to square up the position when the quotations were : Spot US $ 1 1 month margin

INR 31.4300/4500 25/20

2 months margin

45/35

Spot US $ 1

EURO 1.4400/4450

1 month orward

1.4425/4490

2 months orward

1.4460/4530

What will be the gain or loss in the transaction? HINTS Profit on squaring off = ` 274500


15.

A company operating in USA has invoiced sales to an Indian company, the payment being due three months rom the date o invoice. Te invoice amount is $ 14,000 and at current spot rate o $ 0.0243 per Re.1. It is anticipated that the exchange rate will decline by 4% over the three months period and in order to protect the dollar proceeds, the importer proposes to take appropriate action through oreign exchange market. Te three month orward rate is quoted as $ 0.0236 per ` 1. You are required to calculate the expected loss and to show, how it can be hedged by orward contract. HINTS Expected loss = ` 24726, outflow based on E(S) = ` 600858, Outflow based on 3MP = ` 593220 Savings = 7838 = 30.9%

∴

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16.

Somu Electronics imported goods rom Japan on July 1st 2009, o JP ¥ 1 million, to be paid on 31st, December 2009. Te treasury manager collected the ollowing exchange rates on July 01, 2009 rom the bank. Delhi ` /US$ Spot 45.86 /88 6 months orward

46.00/03

okyo JP ¥/ US$ Spot

108/108.50

6 months orward

110/110.60

In spite o act that the orward quotation or JP ¥ was available through cross currency rates, Mr. X, the treasury manager purchased spot US$ and converted US$ into JP ¥ in okyo using 6 months orward rate. However, on 31st December, 2009 ` /US$ spot rate turned out to be 46.24/26. You are required to Calculate the loss or gain in the strategy adopted by Mr. X by comparing the notional cash flow involved in the orward cover or Yen with the actual cash flow o the transaction. HINTS ` 2090 (Loss)


17.

Consider the ollowing table – Particulars Spot Rate ` /$ 1m Swap Pts 2m Swap Pts 3m Swap Pts

1st July 45.30/45.50 40/50 70/80 100/110

1st August 45.40/60 60/50 80/70 100/90

1st September 45.75/95 90/110 130/150 —

CASE (I) : Customer on 1st July sold $ 20,000 2 month orward and cancelled the contract on 1st September. CASE (II) : On 1st August the bank entered into a orward sale contract o 2 months involving $5,00,000. On 1st September the customer requests or extension by 1 month. 8 | © 2014 Sanjay Sara Educational Institute Pvt Ltd. Contact No. 9831092413

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CASE (III) : On 1st July a customer sold $3,00,000 3 month orward. However, on 1st August he want to extend the contract by 1 month. HINTS Case 1 : Profit = ` 1,000 (exclusive fees of £ 100 as per FEDAI) Case 2 : Profit = ` 875000 Case 3 : Profit on Cancellation = ` 420000


18.

A customer with whom the Bank had entered into 3 months orward purchase contract or Swiss Francs 1,00,000 at the rate o ` 36.25 comes to the bank afer two months and requests cancellation o the contract. On this date, the rates are : Spot

CHF I = ` 36.30

36.35

36.45

36.52

One month orward

Determine the amount o Profit or Loss to the customer due to cancellation o the contract. HINTS Loss = 27000 + FEDAI tec


19.

On 30th June 2009 when a orward contract matured or execution you are asked by an importer customer to extend the validity o the orward sale contract or US$ 10,000 or a urther period o three months. Contracted Rate US$1 = ` 41.87 Te US Dollar quoted on 30.6.2009 Spot

` 40.4800/ ` 40.4900

Premium July

0.1100/0.1300

Premium August

0.2300/0.2500

Premium September

0.3500/0.3750

Calculate the cost or your customer in respect o the extension o the orward contract. Follow us on:

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Rupee values to be rounded off to the nearest Rupee. Margin 0.080% or Buying Rate Margin 0.25% or Selling Rate HINTS F14224, 409662


20.

An importer requests his bank to extend the orward contract or US$ 20,000 which is due or maturity on 30th October, 2010, or a urther period o 3 months. He agrees to pay the required margin money or such extension o the contract. Contracted Rate – US$ 1 = 42.32 Te US Dollar quoted on 30-10-2010. Spot – 41.5000/41.5200 3 months Premium - 0.87%, 0.93% Margin money or buying and selling rate is 0.075% and 0.20% respectively. Compute : (i) Te cost to the importer in respect o the extension o the orward contract, and (ii) Te rate o new orward contract. HINTS (i) Loss = ` 17022 (ii) 3mf = 41.9899


21.

You as a dealer in oreign exchange have the ollowing position in Swiss Francs on 31st October, 2004 : Sw Fcs. Balance in the Nostro A/c Credit

1,00,000

Opening Position Overbought

50,000

Purchased a bill on Zurich

80,000

Sold orward 

60,000


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Forward purchase contract cancelled

30,000

Remitted by 

75,000

Draf on Zurich cancelled

30,000

What steps would you take, i you are required to maintain a credit Balance o Sw. Fcs. 30,000 in the Nostro A/c and keep as overbought position on Sw. Fcs. 10,000 ? HINTS Buy SF 5000 spot → Position nIL. To achieve target Position → buy SF 10000 forward


22.

Excel Exporters are holding an Export bill in United States Dollar (USD) 1,00,000, due 60 days hence. Tey are worried about the alling USD value which is currently at ` 45.60 per USD. Te concerned Export Consignment has been priced on an Exchange rate o ` 45.50 per USD. Te Firm’s Bankers have quoted a 60- day orward rate o ` 45.20. Calculate : (i) Rate o discount quoted by the Bank (ii) Te probable loss o operating profit i the orward sale is agreed to. HINTS (i) – 5.43% (ii) Loss = 30000


23.

Te United States Dollar is selling in India at ` 45.50. I the interest rate or a 6-month borrowing in India is 8% per annum and the corresponding rate in USA is 2%, (i) Do you expect United States Dollar to be at a premium or at discount in the Indian orward market; (ii) what is the expected 6-month orward rate or United States Dollar in India; and (iii) what is the rate o orward premium or discount?

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HINTS (i) at a premium (ii) ` 46.8515 / $ (iii) 5.9341%


24.

Te ollowing table reflect interest rate or the US $ and rench rancs. Te spot exchange rate 7.05 rancs per dollars. Complete the missing entries. 3 Months

6 Months

1 Year

11.5%

12.25%

?

19.5%

?

20%

?

?

7.5200

?

–6.3%

?

Dollar interest rate (effective rate) Franc interest rate (effective rate) Forward rate ranc per dollar Forward discount on ranc percent per year HINTS


25.

Spot rate – $ 1.6095/POUND Interest rates (p.a. compounded continuously) i$ = 8% iPound = 3% Find 3 m orward rate. (Use e 0.025 = 1.027) HINTS F = $ 1.6297/£


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Tool Kits is time around, there is a complete revamp of our study materials or it would be better to call it tool kit. It would comprise of 1.

QUESTION BANK is is a compilation of exam representative unsolved questions classied into 3 categories

Past papers



Revision Test Papers



From our desk

is is the book that students need to carry in class everyday. 2. SELF PRACTICE BOOK -is is a compilation of solved problems which the student is expected to try and solve at his own end. It is a well known fact that students get condence only when they solve problems themselves on the basis of concepts practiced in class. is book is meant to full this lacunae. 3. CASE STUDY, SECRET SAUCE, CHEAT SHEET, THEORY AND MIND MAP - is book as the name suggests is our dierential marketing element. As per the institutes prescribed curriculum, they are slowly but steadily moving towards practical based real life case study designed papers to test students ability in applying theoretical concepts in real life d ecision making situations. We are therefore becoming the pioneers in CA EDUCATION providers to have introduced case studies into our preparatory tool kit.

How does a student revise all the concepts and formulas learnt in class its simple use our secret sauce and cheat sheet and mind map-these are leveraging tools for fast track revision. We will nd that the SFM paper throws up around 20 marks of optional theory in the exam. Most of it is prepared in class and the rest is captured in this theory book. 4. MODEL TEST PAPERS : Aer completing the entire curriculum , students are advised to take mock exams from this book in a time bound environment

Lets put in our best to achieve perfection in the subject of SFM. ALL THE BEST Sanjay Saraf

Notes

Forex

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