3. PROBLEM
An American investor purchased securities in Indian
market investing one million dollars, at the time of
investing exchange rate is 50/50.5 Rs while one
year latter the exchange rate is 53/54 Rs . what is
the rate of return to American investor if he rate of
Rs return on Indian security is 20% 25% & 50%.
4. If the rate is = 20%
Amount invested in India =
10,00,000 * 50 = 50,000,000 (50 million)
Return = 100,00,000 (1 million)
After 1 year the amount to be repatriated =
60000000/54= 11,11,111.
Rate of return= 11,11,111/10,00,000 = 11.11%
if the rate = 25%
Amount invested is 10,00,000 * 50 = 5,00,00, 000
at 25% return rate of return in Indian rupees = 5,00,00,000
*25% = 1,25,00,000
at the closing rate = 6,25,00,000/54 = 11,57,407
Return = 157407/10,00,000 = 15.47%
5. If the rate is 50% in Indian Rs term
Investment = 5,00,00,000
Return in Indian Rs = 5,00,00,000*50 = 2,50,00,000 Rs
Total amount to be repatriated in Rs = 7,50,00,000/54
= 13,88,889$
Return on investment = 3,88,889/10,00,000 = 38.89%
6. PROBLEM :-2
Risk free return in India is 8%, an American investor
wants to invest in Indian securities with beta of 2
with variance of 15%while exchange rate of rupees
deprecation by 10% with variance of 20%. Market
related return is 18% and correlation coefficient
between return on security and exchange rate is
25% ,find out the expected rate of return and risk in
investment
7. CAPM THEORY IS APPLIED
As per CAPM the expected return on securities =
risk free interest rate +beta (market rate –risk free
interest rate).
= .08 + 2 (.18 - .08) = 28%
If 100 $ are invested in market then return is 128 $,
then excluding exchange rate.
variance of return = .15+.20+2* .25s square root of
(.15* .20)
= .0.44 = 44% of risk
9. PROBLEM:-1 CROSS RATE
The Germany DM is selling for $ 0.62 & the buying
rate for the French franc (FF) o.17$, what is the
FF/DM cross rate ?
US$0.62 FF FF 3.65
------------- x -------- = ---------------
DM US$ 0.17 DM
10. 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?
US$0.02538 US$ 0.02339 US$ 0.02538 Bhat
---------------- + --------------- = ------------- x ---------
INR Baht US$ 0.02339 INR
Ans : Baht 1.085
----------------
INR
11. THE SPOT PRICE = 0.025063,USD/INR , AND FORWARD
RATE IS 0.02439, USD/INR FOR 6 MONTHS FORWARD , THE
ANNUALIZED PREMIUM IS AS FOLLOWS SELLING AT PREMIUM
Forward premium spot rate- forward rate 360
Or discount = ---------------------------- x -------
forward rate days
For 6 months forward , the annualized premium is as
follows
0.025063 - 0.02439 360
= -------------------------- x ------ = 5.5%
0.02439 180
12. Forward rupees is selling at a discount of 5.5%relative to
the dollar for 6 months. In terms of indirect quote , the
INR/$ spot exchange rate is INR 39.90/$ and forward rate
is INR 41.00/$. For indirect quote, the forward premium or
discount can be calculated as follows:
Forward premium Forward rate - spot rate 360
or discount = --------------------------- x -----
spot rate days
41.00 -39.90 360
= ---------------- x ------
39.90 180 = 5.5%
14. PROBLEM:-3
An exporter has to surrender $ 100,000 to bank . Rate of dollar
against INR is 46/46.15, the bank charge a commission of
.15%. If the transit time fixed by RBI is 20 day and the rate of
interest charge by the bank is 10%.
Find out the net proceeds to be credited to exporters
account?
Find out what is the amount to be paid by the person if
he is an importer instead of exporter?
If Rs $ rate is 46/46.15 $/pound rate is 1.71/1.74 what is
Rs pound rate.
If French franc $is 10.17/10.20 and Swiss franc $ rate is
1.73/1.75. find out French franc / Swiss franc rate?
If one Rs can buy 3.23 yen and if one Rs can buy .028 $
how many yens can 1$ buy?
In London a dealer quotes Dm/pound spot =
3.2550/3.2555,Yen pound spot = 180/181 . What do you
expect yen/Dm rate in Frankfort?
15. Find out the net proceeds to be credited to
exporters account?
Solution: since the exporter sells the dollar to bank
bid price of 46 per $ to be taken . since it involves
buying of $ by bank commission should be
deducted from exchange rate.
Rate to be adopted is = 46 - (46 * .15%) =45.93
Total amount is 100,000* 45.93 = 45,93,000
Interest charged is 10% for 20 days on the net
proceeds. = 45,93,000 * 10 *20/365 = 25,167 Rs
Net proceeds to be credited to the account of
exporter = 45,93,000 - 25,167 = 45,67,833
16. Find out what is the amount to be paid by the person if he
is an importer instead of exporter?
Solution: Since in this case the bank is selling the dollar
to importer , it charges the ask rate of 46.15 and the
commission is added instead of being deducted .
Amount to be paid by the importer
= 46.15+(Rs 46.15*.15%) = 46.22 Rs
The amount to be paid by the importer to bank = $
1,00,000* 46.22 = Rs 46,22,000.
17. If Rs $ rate is 46/46.15 $/pound rate is 1.71/1.74 what is
Rs pound rate.
Rs/pound rate = Rs/$* $/pound (cross rate)
= 46*1.71/46.15*1.74
= 78.66/80.30
If French franc $is 10.17/10.20 and Swiss franc $ rate is
1.73/1.75. find out French franc / Swiss franc rate?
French franc /Swiss franc rate = French franc /$ * Swiss
franc/$.
Swiss franc /$c rate = 1/1.75/1/1.73 = .5714/.5780
French franc /Swiss franc = 10.17*.5714/10.20*.5780
= 5.81/5.90
18. If one Rs can buy 3.23 yen and if one Rs can
buy .028 $ how many yens can 1$ buy?
= .028 $ = 3.23 yen
1 $ = ?
$ = 3.23/.028 = 115.35 yen
19. In London a dealer quotes Dm/pound spot =
3.2550/3.2555,Yen pound spot = 180/181 . What do you
expect yen/Dm rate in Frankfort?
Sol: Yen/Dm spot rate = yen /pound spot rate * pound /Dm
spot rate.
Dm/pound spot rate = 3.2550/3.2555
Pound /Dm spot rate = 1/3.2550/1/3.2555 = .3072/.3071
Yen/Dm spot rate = 181* .3072/181*.3071
= 55.603/55.278
Frankfort get quote of yen/Dm spot 51.1530/51.2550 is
there an arbitrage opportunity
Sol: Buy 1Dm in Frankfort by selling 51.2550 yen, sell 1
Dm and get 55.7278 yen there by making profit of
55.278 - 51.2550 = 4.023 yen
20. January , 24, 2014 a customer requested a bank to
remit DG(Decigram) 250,000 to Holland as
payment for Diamonds, However due to strike the
bank can make payment only on Feb ,1,2014.
Inter bank rates are as follows:
Jan 24,2014 Feb 1 2014
Mumbai $/Rs (100Rs)
3.10/3.15
3.07/3.12
London $/pound
1.7250/60
DG /pound
3.957/90
1.7175/85
3.9380/90
How much does the customer stand
to gain or lose due to delay?
PROBLEM
22. PROBLEM
Consider the value of DEM relative to USD. The
spot rate is DEM 1.82. the interest rates in the US
and Germany are 5% and 3% respectively.
Estimate the price on 4 month forward contract on
DEM.
Solution:
Spot rate of Dem (1USD= DEM) 1.82
Interest rate US =5%
Interest rate in Germany= 3%
23. SOLUTION
Et =Eo (1+rhc/1+rfc)t.
Where et = expected forward rate for time t.
Eo = spot rate
rhc =rate of interest in home currency.
Rfc =rate of interest in foreign currency.
T= time period.
1.82( 1+ 0.03/1+ 0.05) x 4//12 = 0.595
25. PROBLEM
Give the following date, calculate the
arbitrage possibilities
Spot rate : 42.0010=1$
Forward rate (6month)= 42.8020Rs/1$
Annualised interest rate on 6 month Rs:12%
Annualised interest rate on 6 month dollar:8%
26. SOLUTION
The rule is that if the interest rate differential is greater
than the premium or discount ,place the money in the
currency that has a higher rate of interest or vice versa
Negative interest rate differential = 12-8=4%
Forward premium = forward rate –spot rate
------------------------------- X 100
spot rate
42.8020-42.001 12
---------------------- x100 x -------- = 3.8141%
42.0010 6
27. 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
28. 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+ $40 =1040$
Hench the arbitrageur gain + ($1040.16-$1040) =$0.16
on borrowing $1000 for six month
29. PROBLEM: INTEREST RATE PARITY
An American firm purchases $4000 worth of perfume (ff 20,000)
from a French francs. The following quotation and
expectations exist for the FF.
Present spot rate $ 0.2000, US interest rate15%.
90 day forward rate 0.2200, French interest rate 10%
SR 90days = 0.2400.
What is the premium or discount on the forward French francs
? What is the interest differential between US and French ? Is
there an incentive for covered interest arbitrage?
If there is CIA (covered interest arbitrage), how can an
arbitrageur take advantage of the situation? Assume the
arbitrageur is willing to borrow $4000 or FF 20,000 and there
are no transaction costs.
If transaction costs are $50 , would an opportunity still exit for
CIA?
30. SOLUTION
Forward premium on FF = FR-SR/SR X 100
.22-.20
------------ X 100 X 4 = 40%
.20
Interest rate different is 15-10=5% .
Yes there is an incentive for CIA (outflow of trends
from US ) as interest differential in favour of France
is -5% in flour of US 5%.
31. The arbitrageur can take advantage of the situation in the
following manner.
Borrow $4000 for 90 days. So amount is t paid after 90
days
= 4000 (1+15% X1/4) =$4.150
Convert $4000into FF at current SR ie $1=5Ff
$4000 = FF 4000x5 =FF 20,000
$4000= FF 20,000
Invest 20,000 in France @10% p.a for 90 days
Amount received at the end of 90 days = FF 20,500
32. Sell investment proceed forward at rate FF1= $.22
Amount received in US $ after 90 days by selling FF
20500= $ (20500 x .22) = $4510
Amount received =4510$
Amount paid =4150$
------------
Profit = 360$
As the profit of 360$ > transaction cost of 50 $
opportunity still exist for a CIA.
33. PROBLEM
Dm spot was quoted 0.40$ in New York, the
price of the pound sterling was quoted
$1.80.
1. what would you expect the price of the
pound to be in Germany?
2. If the pound were quoted in Frankfort at
Dm 4.40/pound what would you do to
profit from the situation?
34. SOLUTION
1Dm =$ 0.40 ; 1 pound = $1.80
1/0.40Dm = 1/1.80pound
1 pound = 1.80/0.4 Dm = 4.5Dm
= 4.5 Dm/pound.
Buy 1 pound for Dm 4.40 in Frankfort . With this
pound sell in NY: for $1.80. with $1.80 , buy 4.5
Dm . Hench the arbitrager will profit 0.1 Dm for
every 4.40 Dm
35. PROBLEM
You have called your foreign exchange market and asked for
quotations on the spot , 1 month, 3 months, 6 months. The
trader has responded with the following.
= $ 0.024.479/81 3/5 8/7 13/10
1. What does this mean in terms of dollars per euro
2. If you wished to buy spot Euros how much would you pay in
dollars?
3. If you wanted to purchase spot US$ how much would you
pay in euro?
4. What is the premium or discount in the 1, 3, 6 months
forward rates in annual percentages? ( assume you are
buying in Belgian francs)
5.
37. Premium or discount rates in forward market (assuming that buying
in Belgian francs)
0.2486 – 0.2481
1 month = ------------------------ X 12 X100 = 2.42%
forward 0.2481
premium
0.2474 – 0.2481 12
3 month = ------------------------ X 100 X ----- =1.13%
Forward 0.2481 3
Discount
6 month = 0.2471- 0.2481 12
Forward --------------------- X 100 X ----- = 0.8%
Discount 0.2481 6
38. PROBLEM
Spot rate = 44.0030 = $1
6 month FR = 45.0010 = $1
Annualised interest rate on 6 month rupee = 12%
Annualised interest rate on 6 month dollar = 8%
Given the above data is there arbitrage possibility?
39. SOLUTION
6 month forward US $ is being quoted at a
premium as follows
45.0010- 44.0030 12
------------------------- X ------ X100 = 4.5361%
44.0030 6
Interest rate differential = 12-8 = 4%
Since interest rate differential is smaller than the
premium , it would be beneficial to place money in
US $ as 6 month interest rate is lower .
40. An arbitrageur would take the following steps:
1. Borrow Rs10,000 at 12% for 6 months
2. Convert this SR to obtain US$ 227.257 (10,000/44.0030)
3. Invest $ at 8% in money market for 6 months to receive
6 1
= $ 227.257 8 X ----- X ----- + 1
12 100
41. 4. Sell Us$ at 6 month forward to receive
= 236.3473 X 45.0010 = Rs 10635.865
5. Return the rupee debt borrowed at12 % . The
amount to be refunded is Rs 10,600
6 1
=10,000 1+ 12 X ---- X ----- + 1
12 100
Profit = amount received – amount borrowed
= 10,635.865 -10,600 = 35.865
42. PROBLEM
From the following data calculate the possibilities of
gain /loss in arbitrage.
Spot rate FFr 6.00 = $1 , 6 month forward rate FFr
6.0020 = $1.
Annualised interest rate on 6 month s US$ = 5%
Annualised interest rate on 6 month Fr = 8%
(It Direct Quote Method)
43. SOLUTION
Negative interest rate differential = 5 - 8 = -3%
forward Premia (annualized ) = FR-SR/SR *100 * 12/6
= (6.0020 -6.0000 /6.0000) x100 x 12/6 = 0.67%
Here we find that the negative interest rate differential >
forward Premia , Hench there will be arbitrage inflow in
France
44. The arbitrage possibility will be shown below.
1. Assume an arbitrageur borrows $1000 for 6 months.
Amount to be repaid at the end of 6 months will be =
$1000 +$ 1000 x5/1000 x6/12 = $1025.
2. The arbitrage would then convert $ into FF at spot rate
and invest the amount in France @8%. Converting $
into FF at the spot rate $100 –FF 6000.
Invest in France @8% = 6000 x 8/100 x 6/12 = 240
Total amount received is FF 6000 + FF240 = FF 6240.
convert Ff6240 into $ at the forward rate at the end of 6
month = FF 6240 /FF 6.0020 = $ 1039.65.
Amount received by the arbitrageur = $1039.65
Amount paid = $ 1025.00
-----------------------
profit = $ 14.65
45. Problem:
If the current Rs/$ rate is Rs 50, one year inflation rate
is 10% for Rs and 2% for dollar. If 1 year later , the rate
of exchange between $ & Rs in forward rate is 55, is
there scope for arbitrage , if PPP is applicable?
Spot exchange rate between Rs/$ 50, if annual inflation
rate is 10% in India and 3% in us what will be the rate of
return to Indian investor if the return on us security is
10%if PPP is applicable?
In the above case if the percentage of return in India is
10%. What is the rate of return to American investor?
46. Sol :1: S1A/B = S0A/B X (1+rA/1+rB)
S1 = Future Exchange Rate
rA = Interest rate of country A
rB = Interest rate of country B
As per PPP one year later rate will be =
(50* 1.10)/1.02 = 53.92.
Since the present forward rate is not in alignment he can
sell the $ forward
Sol: 2: Indian investor can convertRs50 to one dollar
and invest the same in Us security. After one year he will
get 1.10 $ .
One year later the= $=(50* 1.10)/1.03 =53.40 Rs.
Sol:3: American investor can convert one dollar to 50Rs
and invest the same in Indian market. After one year he
will get Rs 50 * 1.10 = Rs55, if this is converted to dollar
it will be 1.03$ . So the rate will be 3%for American
investor.
47. PROBLEM
An Indian company ,AB ltd imports machinery worth
₤2.0 million and is to make the payment after 6
months. The current rate are
Spot rate = Rs 66.96/₤
6 month forward rate = Rs 67.50 /₤
What should AB ltd do if they expect that in six
month time the pound will settle at Rs67.15/₤?
What are the option available to the company in
case of an expected appreciation / depreciation in
the rupees?
48. SOLUTION
Spot rate ₤1 = Rs 66.96
6 month forward rate ₤1 = 67.50
Expected spot rate after 6 month ₤1 = Rs 67.15
1) Since AB ltd has a liability in foreign currency pound ,
they are importing a machinery worth ₤ 2.0 million . Both
the market and the company expect the pound to
appreciate.
2) Hench company should estimate the relative cost of
hedging and if it is not high , the company should hedge
its payments.
3) Incase of depreciation of pound the company need not
do anything as it stands to gain . In case of appreciation
of pound it should hedge its payments as the company
will be exposed to exchange rate risk
49. PROBLEM
The following data is given:
Spot rate FFrl = 66.60 Rs
6 month forward rate FFrl = Rs 6.85
FFr interest = 8.3%
Rs interest = 10.5 %
Analyze the different arbitrage possibilities
50. SOLUTION
Given the above data if one invest money in India , he
gets = ( 1+ .105/2) =1.0525 after 6 months.
If one invest money in FFr , he gets 6.85/6.60
(1+0.83/2)= Rs10809
So there will be an arbitrage outflow from india.
51. PROBLEM
Set out below is a table of cross rates.
Deutsch
mark
Dollar French
franc
Pound
sterling
Frankfurt ? 2.2819 0.4712 4.0218
New York 0.4421 ? 0.2110 1.8000
Paris 2.0949 4.7393 ? 8.4301
London 4.0207 1.7775 8.4232 ?
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
52. SOLUTION
Given the arbitrage opportunities with no transaction cost.
Arbitrage between Dm & pound : buy pound in Frankfort .
For every Dm, one will get ₤4.0218. These can be sold in
London to get Dm for which one will have to pay ₤ 4.0207.
These can be sold in London to get Dm for which one will
have to pay ₤ 4.0207.Thus there is a potential gain of
0.0011 pounds for every Dm.
Arbitrage between $ & ₤ : buy ₤ in New York and sell in
London.
Arbitrage between FFr and ₤ : buy Paris and sell in
London.
53. Arbitrage between $ & ₤ :buy $ in Frankfort and sell in
New York . For every Dm one will get $2.2819. these can
be sold in Frankfort and sell in New York . For every Dm
one will get $2.2812. these can be sold in New York to get
Dm for which one will have to pay ₤2.2619. thus there is a
potential gain of $0.0193 for every Dm traded.
Arbitrage between Ff and Dm : buy in Paris and sell in
Frankfort. For every FF one will get Dm 2.0949. these can
be sold in Frankfort to get Ff for which one will have to pay
Ff 0.9817. thus there is a potential gain of Ff 0.0128 for
every Dm traded.
Similar arbitrage opportunities will exist across all the
currency combinations.
54. PROBLEM
A foreign exchange trader gives the following quotes for
the Belgian franc Spot , 1 month, 3month , 6 month to us
based treasurer.
= $0.02368/70 4/5 8/7 14/12.
1. Calculate the outright quotes for 1, 3, &6 months
forward?.
2. If the treasurer wished to buy Belgium franc 3 month s
forward how much would the pay in dollars ?
3. If he wished to purchase US$ 1 month forward how
much would he have to pay in Belgium franc?
4. Assuming that Belgian franc are being bought what is the
premium/ discount for the 1, 3, 6 months forward rate in
annual percentage terms?
5. What do the above quotation imply in respect of the term
structure of interest rates in the USA & Belgian?
56. 2. To buy Belgian francs 3 month forward the treasurer has
to pay $ 0.02363.
3.US $ 1 month forward = 1/0.02375= Belgian franc
42.10526.
For 1 month forward premium
= (0.02372-0.02368)/0.02368 x 100 x 12=2..27% p.a.
For 3 month forward discount
= (0.02360- 0.02368)/0.02368 X100 X12/3 = 1.35% p.a.
For 6 month forward discount
= (0.02354- 0.02368)/0.02368 x100 x 12/6 = 1.185 p.a.
4. Belgian interest rates are expected to rise and US
interest rate are expected to fall.
57. PROBLEM
“Compaque” company has to make a US $ 1 million
payment in 3 months time . The dollars are available
now . You decide to invest them for 3 months.
US$ deposit rate :9% p.a.
UK deposit rate :10% p.a.
Present spot rate is $ 1.90/pound.
3 month forward rate is $ 1.88/₤.
Where should the company invest for better returns?
Assuming that the interest rates and the returns spot
exchange rate remain as above what forward rate would
yield an equilibrium situation?
If the sterling deposit rate was 12% p.a. and all other
rates remain as in the original question, where should
you invest?
58. SOLUTION
Alternative :1
1. invest US$ 1 million in Us @9% p.a. for 3 months. Interest earned = (
100,000 x.09 x 3/12) - $ 22,500.
Alternative :2
1. sell the US $ 1 mn and buy pound from the spot market , we get =
1,000,000/1.90
= ₤ 526,315.789.
1. Invest the available ₤ @10% for 3 months yield an interest =
526,315.789 x 10 /100 x 3/12 = 13,157.895.
2. principal + interest after 3 month = 526,315.789 + 13,157.895 = ₤
539,473.684.
3. selling the pound to buy US $ we get 539,473.684 x 1.88 = $
1,014,210.526
4. Hench income = $1,014, 210.526- $1,000,000 = $14210.526. Hench
the company should invest in the US as it results in better return of
US$ 8,290.
59. Assume the forward rate be ‘x’
For an equilibrium situation amount at the end of 3 month s
should be equal . Hench amount invested in sterling covered
by forward rate should be = $ 1,022,500.
Hench x = 1022,500/539473.684 = 1.895
Hench forward rate = $ 1.89 / ₤.
Sell the US$ and buy ₤ from the spot market we get =
1,000,000/1.90 = ₤ 526,315.789
1. invest the available ₤ @12% for 3 months yield an interest =
526,315.789 x 12 /100 x 3/12 = 15,789.473
2. Principal = interest after 3month = 526,315.789 = 15,789.473
= ₤ 542,105.262.
3. Selling the pound to buy US$ we get = 542,105 .262 X1.88 =
$ 1,019,157.893
Thus income (net) = 19,157.893.
1. since interest earned by investing in US$ = 22,500. Hench
even if the sterling deposit rate become 12% p.a. investing
US$ is still a more profitable alternative.
60. PROBLEM 21
A MNC gives the following outright quotations for
the Singaporean dollars:
BID ASk
Spot rates 1.2440 1.2450
1 month 1.2455 2.2475
3month 1.2477 1.2484
6 month 1.2482 1.2498
61. Calculate forward quotes for the Singaporean dollar
as an annual percentage premium or discount if
you reside in US.
calculate the annual percentage premium or
discount on the US dollar for each forward rate for a
foreign exchange trader residing in singapore?
64. PROBLEM
The direct quote in Tokyo for Peso is given as
¥28.8358/MP Bid & ¥ 28.8725/MP Ask, in México city
0.04418/0.04488.
Calculate the bid –ask Spread as percentage of bid price
from the Japanese and from the Mexican perspective.
would there exist an opportunity for profitable arbitrage?
If yes describe the necessary transaction assuming a ¥ 1
million starting amount.
65. SOLUTION
Direct terms Bid rate Ask rate
In Japan ¥ 28.8358/MP ¥28.8725/MP
In Mexico MP 0.04418/¥ MP 0.04422/¥
Bid-Ask- spread as a % in yen (Japanese) = (28.8725-
28.8358)/ 28.8358 = 0.127%.
Bid –Ask-spread as % in MP (Mexican) = (0.04422-
0.04418) / 0.04418 = -0.09%.
Opportunities for arbitrage:( in Mexico & in Tokyo)
In Mexico= MP 0.04418/ ¥ Bid: MP 0.04422/ ¥.
Or
¥22.6142/NP bid: ¥22.6346/MP ask
66. 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
Profit = ¥ 1.229m- ¥ 1m = ¥.229m
Hence profit earned = ¥ 0.229m
67. PROBLEM
call option on euro is written with a strike price of $
0.9400/e at premium of 0.9000$ per euro/E and with an
expiration data 3 month s from now . The option is for E
100,000. calculate your profit or loss if the excise before
maturity at the time when the euro is traded spot at:
$ 0.9000/e
$ 0.9200/e
$ 0.9400/e
$ 0.9600/e
$ 0.9800/e
$ 1.0000/e
$ 1.0200/e
69. PROBLEM
Spot and 180 day forward exchange rates of
several major currencies are given . For each pair
calculate the percentage premium or discount
expressed as annual rate.
Countries Quotation spot rate 180 days forward rate
European euro $ 0.8000/e $0.8160/e
British pound $ 1.562/₤ $1.5300/₤
Japanese yen ¥120.00/$ ¥118.00/$
Swiss franc SF 1.6000/$ SF 1.6200/$
Hong kong dollar HK $ 8.000/$ HK $7.8000/$
70. SOLUTION
Forward premium/ discount =
= FR-SR/SR X100 X360/number of days.
European Euro = 0.8160- 0.8000/0.8000 X 360/180X100
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%
72. 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.
73. 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.
75. 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
77. 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
Account receivable = 220000
Inventory = 320000
Net plant and equipment = 200000
---------------
Total 8,40,000
Current liabilities =C $ 60,000
Long term debt = 160,000
Capital stock =620000
----------------
total 8,40,000
78. 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 $. Assume all accounts
remain as they were at the beginning of the year.
79. SOLUTION
Current /non
current method
C$ Exchange
rate
Conversion to US$ on jan 1
20x2
Assets
1. Account
receivable
2. cash
3. Inventory
4. Plant &
equipment
Liabilities
1. Current
liabilities
2. Long term
debt
3. Capital stock
CTA
100,000
220,000
320,000
200,000
60,000
160,000
620,000
========
840,000
1.8
1.8
1.8
1.8
1.8
1.8
1.6
(100000/1.8)
= 55,555.55
= 122,222.22
= 1,77,777.77
= 1,11,111.11
--------------------
= 4,66,666.66
-------------------
= 33,333.33
= 88,888.88
= 3,87,500.00
= (43,055.55)
--------------------
4,66,666.66
80. 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
Cumulative Translation Adjustment :- Cumulative Translation
Adjustments are an integral part of the financial statements for firms
with international market exposure.
An entry in the comprehensive income section of a translated
balance sheet summarizing the gains/losses resulting from varying
exchange rates over the years. A CTA entry is required under the
Financial Accounting Standards Board (FASB) No.52 rule as a
means of helping investors differentiate between actual operating
gains/losses and those generated via translation.
(Opening Functional Balance x (Current month-end rate - Previous
month-end rate)] + [Sum(Transactions in month) x (Current month-end
rate - current average rate)]
) x [-1]
81. Monetary/non
monetary method
C$ Exchange rate Cinversion to US
$ on jan 1 20x2
• Cash
• Account
receivable
• Inventory
• Plant & equipment
• ===========
• Current liabilities
• Long term debt
• Capital stock
CTA
100,000
220,000
320,000
200,000
=========
60,000
160,000
620,000
1.8
1.8
1.6
1.6
1.8
1.8
1.6
55,555.55
122,222.22
200,000.00
125,000
==========
5,02,777.77
33,333.33
88,888.88
38,7500.
(6,944.44)
82. AS PER THE MONETARY/ NON MONETARY
METHOD
Accounting exposure on jan /1/20x2
Exposure assets= US $ 1,77,777.77
Exposure liabilities =US $ 1,22,222.21
Accounting exposure = 55555.57
Accounting lose as on CTA a/c =US $ 6,944.44
83. PROBLEM
ABC house ltd manufactures orange marmalade
in England .it is the wholly owned subsidiary of
XYZ Inc. of USA the financial currency for ABC
is the pound sterling which currently sells at
$1.5000/£. The reporting currency for XYZ is the
US $ . Non- consolidated financial statement for
both ABC and XYZ are as follows ( in thousand )
84. ASSETS XYZ ABC LIBILITES XYZ ABC
• CASH
• ACCOUNT
RECEIVABLE
• INVENTORY
• NET PLANT &
EQUIPMENT
• INVESTMENT
$ 8000
10,000
8,000
10,000
4,500
₤ 2000
4000
2000
6000
----
• CURRENT
LIABILTIES
• 5 YEAR TERM
LOAN
• CAPITAL STOCK
• RETAINED
EARNING
$ 22,000
----
9,000
9,500
£ 4,000
4,000
2,000
4,000
Prepare a consolidation balance sheet for XYZ ltd.
What is ABC LTD accounting exposure in dollars ? Use the current rate
method of calculation.
Before n business activates take place the pound sterling deprecation 9% in
value relative to the dollars what is the new spot rate?
What is XYZ accounting loss or gain if any by the current rate method /
Monterey non monetary method
85. SOLUTION
Balance sheet for ABC ltd in dollar
Assets ABC Rate $ Liabilities ABC Rate $
CASH ₤2000 1.5 3000 CURRENT
LIABILTIES
£ 4000 1.5 6000
ACCOUNT
RECEIVABLE
4000 1.5 6000 5 YEAR TERM
LOAN
4000 1.5 6000
INVENTORY 2000 1.5 3000 CAPITAL
STOCK
2000 1.5 3000
NET PLANT &
EQUIPMENT
6000 1.5 9000 RETAINED
EARNING
4000 1.5 6000
14000 21000 14000 21000
86. CONSOLIDATION BALANCE SHEET FOR XYZ
AND ITS SUBSIDIARY ABC LTD
Assets Amount Liabilties Amount
CASH $11000
(8000+3000)
Current
liabilities
$ 28000
(22000+6000)
ACCOUNT
RECEIVABLE
16000
(10000+6000)
5 year term loan 6000 (0+ 6000)
INVENTORY 11000
(8000+3000)
Capital stock 12000
(9000+3000)
NET PLANT &
EQUIPMENT
19000(10000+9
000)
Retained
earning
15500
(9500+6000)
INVESTMENT 4500
Total 61500 Total 61500
87. B. USING THE CURRENT RATE METHOD
Assets Amount
Cash $ 3000
Accounts receivable $ 6000
Inventory $ 3000
Net plant & equipment $ 9000
total $ 21000
Liabilities tterm loan Amount
Current liabilities $ 6000
5 yrs term loan 6000
Capital stock 2000
Retained earning 4000
total 18000
88. CONTI…………….
Accounting Exposure (21000-18000) = $3000.
New position of the firm after deprecation
Assets Current rate
method
m/nm amount
Cash $ 2730
(3000*9%)-3000
$ 2730
Account
receivable
$ 5460
(6000*9%)-6000
$ 5460
Inventory $ 2730
(3000*9%)-3000
$ 3000
Net plant
equipment
$ 8190
(9000*9%)-9000
$ 9000
Total $ 19110 $ 20190
89. Liabilities & net worth
Current liabilities $ 5460 $ 5460
5 yrs term loan $ 5460 $ 5460
Capital stock $ 3000 $ 3000
Retained earning $ 6000 $ 6000
CTA (810) 270
total $19110 $ 20190
Loss by current method =$ 810
Gain monetary/non monetary method =270$
90. PROBLEM
New Haven a dealer based in Europe is owned by
an MNC inc. of the united states. Given below is
new haven’s balance sheet at the current exchange
rate of $1.50/ euro.
Value in euro At value at $ 1.5/euro
Assets
Cash & short term securities $ 50,000 $ 75,000
Account receivable $ 30,000 $ 45,000
Inventory $ 20,000 $ 30,000
Plant equipment $ 600,000 $ 900,000
Total assets $700,000 $10,50,000
91. Liabilities Value in euro Value at $1.5/e
Account payable $ 150,000 $ 225,000
Short term debt $ 60,000 $ 90,000
Long term debt $ 410,000 $ 615,000
Net worth $ 80,000 $ 120,000
Total liabilities and net
$7,00,000 $ 10,50,000
worth
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.
92. SOLUTION
Value in
euro
Value at 1.50 (in
$)
Assets;
• Cash and short term
securities
• Account receivable
• Inventory
• Plant and equipment
Total assets
Liabilities
• Account receivable
• Short term debt
• Long term debt
• Net worth
Total liabilities & net
worth
50,000
30,000
20,000
600,000
700,000
150000
60,000
410000
80,000
700,000
75000
45000
30000
900,000
1050000
2,25000
90,000
615,000
120,000
1050,000
93. Deprecation = 25%
initial euro = 1.5$
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$
94. Balance sheet In euro Ex
.
rat
e
C /non C ($) Ex.
rate
Tempora
l ($)
Ex.
rate
Cur. Rate
($)
Assets:
• Cash & short
term
securities.
• Account
receivable
• Inventory
• Plant &
equipment
Total asset
Liabilities
• Account
payable
• Short term
securities
• Long term
securities
• Net worth
Total liabilities
Translation
exposure
50,000
30,000
20,000
600,00
700,000
150,000
60,000
410,000
80,000
700,000
1.2
1.2
1.2
1.5
1.2
1.2
1.5
1.5
(50,000x1.2)
60,000
36000
24000
900,000
1020,000
180000
72000
615000
120000
987000
33000
1.2
1.2
1.2
1.5
1.2
1.2
1.2
1.5
60,000
36000
24000
900,000
1020,000
180,000
72,000
492,000
120,000
864000
156000
1.2
1.2
1.2
1.2
1.2
1.2
1.2
1.5
60,000
36000
24000
720,000
840,000
180000
72000
492000
120000
864000
-24000
95. PROBLEM
An MNC has account receivable of $ 1.8 billion and
account payable of $940 million . It also has
borrowed $ 700 million . The current spot rate is $
1.81138/£
What is the MNC dollar transaction exposure in
dollar terms? In pound term?
Suppose the pound appreciates to $ 2.1122 /₤ what
is the MNC gain or loss in pound terms , on its
dollar transaction exposure?
96. SOLUTION
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
97. 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
So this is a loss of (£ 88.21 – £ 75.75) = £12.46 mn
98. PROBLEM
A foreign company expect to receive Mexico $ 15
million entertainment fees from Mexico in 90 days .
The current spot rate is $0.2320/M$ and the 90 day
forward rate is 0.2240/M$.
What I the company’s peso transaction exposure
associated with this fee?
What is the expected US $ value of the fee if the
spot rate expected in 90 days in $0.2305. also
calculate the hedged dollar value of the fee?
99. SOLUTION
Mex $ received if the fee to be paid today = $ million
15 x .2320 = US $ 3.48 million
Mex $ received by the foreign company if the fee is to be
paid in 90 days = 15 x .2240 = US $ 3.36 million
Transaction exposure = 3.36 - 3.48 = -0.12 million
B. The expected US$ fee = 15 x .2305 = Us $ 34,57,500
The hedged dollar value of the fee is = 3480,000 –
3457000 = $ 23,000.
100. PROBLEM
AV ltd is the Indian affiliate of affiliate of a US
sports manufacture . AV ltd manufacture items
which are sold primarily in the united states and
Europe .AV balance sheet in thousand of rupees as
of march 31 is as follows:
Assets Liabilities
Cash $ 6000
Account receivable $ 4500
Inventory $ 4500
Net plant equipment $ 10,000
Total $ 25000
Account payable $ 3500
Short term bank loan $ 1500
Long term loan $ 4000
Capital stock $ 10,000
Retained earning $ 6000
101. 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
102. SOLUTION
Exchange rate:
RS 35/$ historical rate for the others
RS 40/$ for inventory march 31 – historical rate for
inventory.
RS 42/$ for April 1 – current rate as on April 1
103. Rs Ex.
Change
rate
Conversion to $
on Nov 31
Ex.
Change
rate
Conversion to
$ on April 1
• Cash
• A/c
Receivable
• Inventory
• Plant &
equipment
• Total
• Account
payable
• short term
loan
• Long term
loan
• Capital
stock
• retained
earning
• CTA
• Total
6000
4500
4500
10,000
25000
3500
1500
4000
10,000
6000
40
40
40
40
40
40
40
35
35
$ 150
$112.50
$112.50
$250.00
$625.00
$87.50
$37.50
$100.00
$285.71
$171.43
(57.14)
$625.00
42
42
42
42
42
42
42
35
35
$ 142.50
$107.14
$107.14
$238.10
$595.24
$83.33
$35.71
$95.24
$285.71
$171.043
(76.19)
$595.24
104. ACCOUNTING LOSS BY CURRENT RATE
METHOD IS $ 57.14 ON MARCH 31
March 31 April 1
Exposed assets $ 625.00 $ 595.24
Exposed liabilities $ 225.00 $ 214.28
Net exposed $ 400.00 $ 380.96
105. Monetary /non monetary method
Rs Ex. Change
rate
Conversion to $ on
Nov 31
Ex. Change
rate
Conversion to $ on
April 1
• Cash
• A/c
Receivable
• Inventory
• Plant &
equipment
• Total
• Account
payable
• short term
loan
• Long term
loan
• Capital
stock
• retained
earning
• CTA
• Total
6000
4500
4500
10,000
25000
3500
1500
4000
10,000
6000
40
40
35
35
40
40
40
35
35
$ 150
$112.50
$128.50
$285.71
$676.78
$87.50
$37.50
$100.00
$285.71
$171.43
(5.36)
$676.78
42
42
35
35
42
42
42
35
35
$ 142.50
$107.14
$128.57
$285.71
$664.29
$83.33
$35.71
$95.24
$285.71
$171.043
(7.13)
$664.29
106. MONETARY / NON MONETARY METHOD
Accounting loss by monetary / non monetary
Is = $ 5.36 on march 31,= $ 7.13 on April 1
March 31 April 1
Exposed assets $ 262.50 $ 250.00
Exposed liabilities $ 225.00 $ 214.28
Net exposed $ (37.5) $ (35.72)