Foreign Exchange Exposure and Risk

Management – Questions [47]

“Operations in foreign exchange market are exposed to a number of risks.” Discuss. or

What are the risks to which foreign exchange transactions are exposed? (4 Marks) (November 2014)

Question 2

What is the meaning of:

(i) Interest Rate Parity and

(ii) Purchasing Power Parity? (4 Marks) (May 2011)

Question 3

Write short notes on the following:

(a) Leading and lagging (4 Marks) (November 2011)

(b) Meaning and Advantages of Netting (4 Marks) (May 2012)

(c) Nostro, Vostro and Loro Accounts (4 Marks) (May 2012)

Question 4

The price of a bond just before a year of maturity is $ 5,000. Its redemption value is $ 5,250 at

the end of the said period. Interest is $ 350 p.a. The Dollar appreciates by 2% during the said

period. Calculate the rate of return. (4 Marks) (May 2012)

XYZ Bank, Amsterdam, wants to purchase ` 25 million against £ for funding their Nostro

account and they have credited LORO account with Bank of London, London.

Calculate the amount of £’s credited. Ongoing inter-bank rates are per $, ` 61.3625/3700 &

per £, $ 1.5260/70. (4 Marks) (November 2013)

Question 6

You sold Hong Kong Dollar 1,00,00,000 value spot to your customer at ` 5.70 & covered

yourself in London market on the same day, when the exchange rates were

US$ 1 = H.K.$ 7.5880 7.5920

Local inter bank market rates for US$ were

Spot US$ 1 = ` 42.70 42.85

Calculate cover rate and ascertain the profit or loss in the transaction. Ignore brokerage.

(4 Marks) (November 2005)

Question 7

A Bank sold Hong Kong Dollars 40,00,000 value spot to its customer at ` 7.15 and

covered itself in London Market on the same day, when the exchange rates were:

US$ = HK$ 7.9250 7.9290

Local interbank market rates for US$ were

Spot US$ 1 = ` 55.00 55.20

You are required to calculate rate and ascertain the gain or loss in the transaction. Ignore

brokerage.You have to show the calculations for exchange rate up to four decimal points.

(5 Marks) (May 2013), (5 Marks) (May 2014)

Edelweiss Bank Ltd. sold Hong Kong dollar 2 crores value spot to its customer at

` 8.025 and covered itself in the London market on the same day, when the exchange rates were

US$ 1 = HK $ 7.5880- 7.5920

Local interbank market rates for US $ were

Spot US $ 1 – ` 60.70-61.00

Calculate the cover rate and ascertain the profit or loss on the transaction. Ignore brokerage.

(5 Marks) (November 2014)

Question 9

You, a foreign exchange dealer of your bank, are informed that your bank has sold a T.T. on

Copenhagen for Danish Kroner 10,00,000 at the rate of Danish Kroner 1 = ` 6.5150. You are

required to cover the transaction either in London or New York market. The rates on that date

are as under:

Mumbai-London ` 74.3000 ` 74.3200

Mumbai*-New York ` 49.2500 ` 49.2625

London-Copenhagen DKK 11.4200 DKK 11.4350

New York-Copenhagen DKK 07.5670 DKK 07.5840

In which market will you cover the transaction, London or New York, and what will be the

exchange profit or loss on the transaction? Ignore brokerages. (5 Marks) (November 2013)

* In question paper it was wrongly printed as London

Following are the details of cash inflows and outflows in foreign currency denominations of

MNP Co. an Indian export firm, which have no foreign subsidiaries:

Currency Inflow Outflow Spot rate Forward rate

US $ 4,00,00,000 2,00,00,000 48.01 48.82

French Franc (FFr) 2,00,00,000 80,00,000 7.45 8.12

U.K. £ 3,00,00,000 2,00,00,000 75.57 75.98

Japanese Yen 1,50,00,000 2,50,00,000 3.20 2.40

(i) Determine the net exposure of each foreign currency in terms of Rupees.

(ii) Are any of the exposure positions offsetting to some extent? (4 Marks) (November 2006)

Question 11

The following 2-way quotes appear in the foreign exchange market:

Spot 2-months forward

RS/US $ `46.00/`46.25 `47.00/`47.50

Required:

(i) How many US dollars should a firm sell to get ` 25 lakhs after 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?

(6 Marks) (June 2009) (M)

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 $ = ` 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 ` 65. Forward rates for August 2014 are

INR/US $ = ` 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 $ = ` 66.25

JPY/US$ = JPY 110.85

Is the decision to take forward cover justified? (5 + 3 = 8 Marks)(May 2014)

Question 13

Gibralater Limited has imported 5000 bottles of shampoo at landed cost in Mumbai, of US $ 20 each.
The company has the choice for paying for the goods immediately or in 3 months time. It has a clean
overdraft limited where 14% p.a. rate of interest is charged. Calculate which of the following method
would be cheaper to Gibralter Limited.

(i) Pay in 3 months time with interest @ 10% and cover risk forward for 3 months.

(ii) Settle now at a current spot rate and pay interest of the overdraft for 3 months.

The rates are as follow :

Mumbai ` /$ spot : 60.25-60.55

3 months swap : 35/25 (8 Marks)(November 2014)

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 an 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:

Spot 1 USD Rs. 56.50

60 days forward for 1 USD Rs. 57.10

90 days forward for 1 USD Rs.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. (8 Marks) (November 2012)

Question 15

Followings are the spot exchange rates quoted at 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 USD1,00,00,000. Assuming that there are no transaction costs, explain whether
there is any arbitrage gain possible from the quoted spot exchange rates. (6 Marks) (Novemb 2008) (M)

Question 16

The US dollar is selling in India at ` 55.50. If the interest rate for a 6 months borrowing in India is 10% per
annum and the corresponding rate in USA is 4%.

(i) Do you expect that US dollar will be at a premium or at discount in the Indian Forex Market?

(ii) What will be the expected 6-months forward rate for US dollar in India? and

(iii) What will be the rate of forward premium or discount? (5 Marks) (November 2012)
Question 17

A company operating in Japan has today effected sales to an Indian company, the payment being due 3
months from the date of invoice. The invoice amount is 108 lakhs yen. At today's spot rate, it is
equivalent to ` 30 lakhs. It is anticipated that the exchange rate will decline by 10% over the 3 months
period and in order to protect the yen payments, the importer proposes to take appropriate action in
the foreign exchange market. The 3 months forward rate is presently quoted as 3.3 yen per rupee. You
are required to calculate the expected loss and to show how it can be hedged by a forward contract.

(6 Marks) (November 2003)

Question 18

ABC Co. have taken a 6 month loan from their foreign collaborators for US Dollars 2 millions. 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 ` 48.5275

6 months forward ` 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. (10 Marks) (November 2003)

Question 19

Excel Exporters are holding an Export bill in United States Dollar (USD) 1,00,000 due 60 days hence. They
are worried about the falling USD value which is currently at ` 45.60 per USD. The concerned Export
Consignment has been priced on an Exchange rate of ` 45.50 per USD. The Firm’s Bankers have quoted a
60-day forward rate of ` 45.20.

Calculate:

(i) Rate of discount quoted by the Bank

(ii) The probable loss of operating profit if the forward sale is agreed to. (4 Marks) (November 2004)
Question 20

The United States Dollar is selling in India at ` 45.50. If the interest rate for a 6-months 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 forward market?

(ii) What is the expected 6-months forward rate for United States Dollar in India; and

(iii) What is the rate of forward premium or discount? (9 Marks) (May 2004)

Question 21

An Indian importer has to settle an import bill for $ 1,30,000. The exporter has given the Indian

exporter two options: (i) Pay immediately without any interest charges. (ii) Pay after three months with
interest at 5 percent per annum.

The importer's bank charges 15 percent per annum on overdrafts. The exchange rates in the market are
as follows:

Spot rate (` /$) : 48.35 /48.36

3-Months forward rate (` /$) : 48.81 /48.83

The importer seeks your advice. Give your advice. (6 Marks) (November 2011)

Question 22

A company is considering hedging its foreign exchange risk. It has made a purchase on 1st. January, 2008
for which it has to make a payment of US $ 50,000 on September 30, 2008. The present exchange rate is
1 US $ = ` 40. It can purchase forward 1 US $ at ` 39. The company will have to make a upfront premium
of 2% of the forward amount purchased. The cost of funds to the company is 10% per annum and the
rate of corporate tax is 50%. Ignore taxation.

Consider the following situations and compute the Profit/Loss the company will makeif it hedges its
foreign exchange risk:

(i) If the exchange rate on September 30, 2008 is ` 42 per US $.

(ii) If the exchange rate on September 30, 2008 is ` 38 per US $. (8 Marks) (May 2008)
Question 23

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 ` 225 ` 395 ` 510

Export sale price per unit Yen 650 US$10.23 Euro 11.99

Receipts from sale due in 90 days Yen 78,00,000 US$1,02,300 Euro 95,920

Foreign exchange rate information:

Yen/ ` US$/ ` Euro/`

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 it’s foreign
currency risk or not. (8 Marks) (November 2007)

Question 24

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, 2005. Market information as at June 1,
2005 is:

Exchange Rates Currency Futures

US $/` US $/` Contract size ` 4,72,000

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 ` 10,000 7.50%

On September 1, 2005 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.

(10 Marks) (November 2006)

Question 25

Spot rate 1 US $ = `48.0123

180 days Forward rate for 1 US $ = `48.8190

Annualised interest rate for 6 months – Rupee = 12%

Annualised interest rate for 6 months – US $ = 8%

Is there any arbitrage possibility? If yes how an arbitrageur can take advantage of the situation, if he is
willing to borrow `40,00,000 or US $83,312. (5 Marks) (November 2006)

Question 26

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.

What operations would be carried out to take the possible arbitrage gains? (8 Marks) (May 2006)
Question 27

Given the following information:

Exchange rate-Canadian Dollar 0.666 per DM (Spot)

Canadian Dollar 0.671 per DM (3 months)

Interest rates-DM 8% p.a.

Canadian Dollar 10% p.a.

What operations would be carried out to earn the possible arbitrage gains?(8 Marks) (Nov : 2010) (S)

Question 28

An Indian exporting firm, Rohit and Bros., would be cover itself against a likely depreciation of pound
sterling. The following data is given :

Receivables of Rohit and Bros : £500,000

Spot rate : ` 56.00/£

Payment date : 3-months

3 months interest rate : India : 12 per cent per annum : UK : 5 per cent per annum

What should the exporter do? (6 Marks) (November 2008) (S)

Question 29

An exporter is a UK based company. Invoice amount is $3,50,000. Credit period is three months.
Exchange rates in London are :

Spot Rate ($/£) 1.5865 – 1.5905

3-month Forward Rate ($/£) 1.6100 – 1.6140

Rates of interest in Money Market :

Deposit Loan

$ 7% 9%

£ 5% 8%
Compute and show how a money market hedge can be put in place. Compare and contrast the outcome
with a forward contract. (6 Marks) (November 2008) (S), (7 Marks) (November 2009) (M)

Question 30

The rate of inflation in India is 8% per annum and in the U.S.A. it is 4%. The current spot rate for USD in
India is ` 46.

What will be the expected rate after 1 year and after 4 years applying the Purchasing Power Parity
Theory. (4 Marks) (May 2010) (S)

Question 31

(i) The rate of inflation in USA is likely to be 3% per annum and in India it is likely to be 6.5%. The current
spot rate of US $ in India is ` 43.40. Find the expected rate of US $ in India after one year and 3 years
from now using purchasing power parity theory. (4 Marks) (November 2008) (S)

(ii) On April 1, 3 months interest rate in the UK £ and US $ are 7.5% and 3.5% per annum respectively.
The UK £/US $ spot rate is 0.7570. What would be the forward rate for US $ for delivery on 30th June?

(4 Marks) (November 2008) (S)

Question 32

An importer requests his bank to extend the forward contract for US$ 20,000 which is due for maturity
on 30th October, 2010, for a further period of 3 months. He agrees to pay the required margin money
for such extension of the contract.

Contracted Rate – US$ 1= ` 42.32

The US Dollar quoted on 30-10-2010:-

Spot – 41.5000/41.5200

3 months’ Premium - 0.87% /0.93%

Margin money for buying and selling rate is 0.075% and 0.20% respectively.Compute:

(i) The cost to the importer in respect of the extension of the forward contract, and

(ii) The rate of new forward contract. (4 Marks) (November 2010) (M)
Question 33

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 Forward 3 Months 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 Price Calls Puts

(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. (8 Marks) (November 2013)

Question 34

XYZ Ltd. a US firm will need £ 3,00,000 in 180 days. In this connection, the following information is
available:

Spot rate 1 £ = $ 2.00

180 days forward rate of £ as of today = $1.96

U.K. US

180 days deposit rate 4.5% 5%

180 days borrowing rate 5% 5.5%

A call option on £ that expires in 180 days has an exercise price of $ 1.97 and a premium of $ 0.04.

XYZ Ltd. has forecasted the spot rates 180 days hence as below:

Future rate Probability

$ 1.91 25%

$ 1.95 60%

$ 2.05 15%

Which of the following strategies would be most preferable to XYZ Ltd.?

(a) A forward contract;

(b) A money market hedge;

(c) An option contract;

(d) No hedging. Show calculations in each case. (8 Marks) (May 2007)

Question 35

A Ltd. of U.K. has imported some chemical worth of USD 3,64,897 from one of the U.S. suppliers. The
amount is payable in six months time. The relevant spot and forward rates are:

Spot rate USD 1.5617-1.5673

6 months’ forward rate USD 1.5455 –1.5609

The borrowing rates in U.K. and U.S. are 7% and 6% respectively and the deposit rates are 5.5% and
4.5% respectively.

Currency options are available under which one option contract is for GBP 12,500. The option premium
for GBP at a strike price of USD 1.70/GBP is USD 0.037 (call option) and USD 0.096 (put option) for 6
months period. The company has 3 choices:

(i) Forward cover

(iii) Currency option

Which of the alternatives is preferable by the company? (8 Marks) (May 2010) (M)

Question 36

Nitrogen Ltd, a UK company is in the process of negotiating an order amounting to €4 million with a
large German retailer on 6 months credit. If successful, this will be the first time that Nitrogen Ltd has
exported goods into the highly competitive German market. The following three alternatives are being
considered for managing the transaction risk before the order is finalized.

(i) Invoice the German firm in Sterling using the current exchange rate to calculate the invoice amount.

(ii) Alternative of invoicing the German firm in € and using a forward foreign exchange contract to hedge
the transaction risk.

(iii) Invoice the German first in € and use sufficient 6 months sterling future contracts (to the nearly
whole number) to hedge the transaction risk.

Following data is available:

Spot Rate € 1.1750 - €1.1770/£

6 months forward premium 0.60-0.55 Euro Cents

6 months further contract is currently trading at €1.1760/£

6 months future contract size is £62500

Spot rate and 6 months future rate €1.1785/£

Required:

(a) Calculate to the nearest £ the receipt for Nitrogen Ltd, under each of the three proposals.

(b) In your opinion, which alternative would you consider to be the most appropriate and the reason
thereof. (4+4 Marks) (November 2011)
Question 37

Sun Ltd. is planning to import equipment from Japan at a cost of 3,400 lakh yen. The company may avail
loans at 18 percent per annum with quarterly rests with which it can import the equipment. The
company has also an offer from Osaka branch of an India based bank extending credit of 180 days at 2
percent per annum against opening of an irrecoverable letter of credit.

Additional information:

Present exchange rate ` 100 = 340 yen

180 day’s forward rate ` 100 = 345 yen

Commission charges for letter of credit at 2 per cent per 12 months.

Advice the company whether the offer from the foreign branch should be accepted.

(6 Marks) (November 2008) (M)

Question 38

NP and Co. has imported goods for US $ 7,00,000. The amount is payable after three months. The
company has also exported goods for US $ 4,50,000 and this amount is receivable in two months.

For receivable amount a forward contract is already taken at ` 48.90.

The market rates for ` and Dollar are as under:

Spot ` 48.50/70

Two months 25/30 points

Three months 40/45 points

The company wants to cover the risk and it has two options as under :

(A) To cover payables in the forward market and

(B) To lag the receivables by one month and cover the risk only for the net amount. No interest for
delaying the receivables is earned. Evaluate both the options if the cost of Rupee Funds is 12%. Which
option is preferable? (8 Marks) (May 2012)
Question 39

On January 28, 2010 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, 2010.

The interbank market rates were as follows:

January, 28 February 4

Bombay US$1 = ` 45.85/45.90 45.91/45.97

London Pound 1 = US$ 1.7840/1.7850 1.7765/1.7775

Pound 1 = SGD 3.1575/3.1590 3.1380/3.1390

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?

(Calculate rate in multiples of .0001) (8 Marks) (May 2005), (5 Marks) (November 2011)

(8 Marks) (May 2014)

Question 40

A customer with whom the Bank had entered into 3 months forward purchase contract for Swiss Francs
1,00,000 at the rate of ` 36.25 comes to the bank after two months and requests cancellation of the
contract. On this date, the rates are:

Spot CHF 1 = ` 36.30 36.35

One month forward 36.45 36.52

Determine the amount of Profit or Loss to the customer due to cancellation of the contract.

(4 Marks) (November 2004)

Question 41

Your forex dealer had entered into a cross currency deal and had sold US $ 10,00,000 against EURO at
US $ 1 = EURO 1.4400 for 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 INR 31.4300/4500

1 month margin 25/20

Spot US $ 1 EURO 1.4400/4450

1 month forward 1.4425/4490

2 months forward 1.4460/4530

What will be the gain or loss in the transaction? (6 Marks) (June 2009) (S)

Question 42

AMK Ltd. an Indian based company has subsidiaries in U.S. and U.K. Forecasts of surplus funds for the
next 30 days from two subsidiaries are as below:

U.S. $12.5 million

U.K. £ 6 million

Following exchange rate information is obtained:

$/` £/`

Spot 0.0215 0.0149

30 days forward 0.0217 0.0150

Annual borrowing/deposit rates (Simple) are available.

` 6.4%/6.2%

$ 1.6%/1.5%

£ 3.9%/3.7%

The Indian operation is forecasting a cash deficit of ` 500 million.

It is assumed that interest rates are based on a year of 360 days.

(i) Calculate the cash balance at the end of 30 days period in ` for each company under each of the
following scenarios ignoring transaction costs and taxes:

(a) Each company invests/finances its own cash balances/deficits in local currency independently.

(b) Cash balances are pooled immediately in India and the net balances are invested/borrowed for the
30 days period.

(ii) Which method do you think is preferable from the parent company’s point of view? (8 Marks)
Question 43

On 19th April following are the spot rates

Spot EURO/USD 1.20000 USD/INR 44.8000

Following are the quotes of European Options:

Currency Pair Call/Put Strike Price Premium Expiry date

EUR/USD Call 1.2000 $ 0.035 July 19

EUR/USD Put 1.2000 $ 0.04 July 19

USD/INR Call 44.8000 ` 0.12 Sep. 19

USD/INR Put 44.8000 ` 0.04 Sep. 19

(i) A trader sells an at-the-money spot straddle expiring at three months (July 19).Calculate gain or loss if
three months later the spot rate is EUR/USD 1.2900.

(ii) Which strategy gives a profit to the dealer if five months later (Sep. 19) expected spot rate is
USD/INR 45.00. Also calculate profit for a transaction USD 1.5 million. (8 Marks) (June 2009) (S)

Question 44

You have following quotes from Bank A and Bank B:

Bank A Bank B

SPOT USD/CHF 1.4650/55 USD/CHF 1.4653/60

3 months 5/10

6 months 10/15

SPOT GBP/USD 1.7645/60 GBP/USD 1.7640/50

3 months 25/20

6 months 35/25

Calculate :

(i) How much minimum CHF amount you have to pay for 1 Million GBP spot?

(ii) Considering the quotes from Bank A only, for GBP/CHF what are the Implied Swap points for Spot
over 3 months? (6 Marks) (June 2009) (S)
Question 45

M/s Omega Electronics Ltd. exports air conditioners to Germany by importing all the components from
Singapore. The company is exporting 2,400 units at a price of Euro 500 per unit. The cost of imported
components is S$ 800 per unit. The fixed cost and other variables cost per unit are ` 1,000 and ` 1,500
respectively. The cash flows in Foreign currencies are due in six months. The current exchange rates are
as follows:

`/Euro 51.50/55

`/S$ 27.20/25

After six months the exchange rates turn out as follows:

`/Euro 5 2.00/05

`/S $ 27.70/75

(1) You are required to calculate loss/gain 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 air conditioners is ` 25,000 :

(i) the current exchange rate changes to

Rs/Euro 51.75/80

Rs/S$ 27.10/15

(ii) Price elasticity of demand is estimated to be 1.5

(iii) Payments and receipts are to be settled at the end of six months.(12 Marks) (November 2009) (S)

Question 46

Your bank’s London office has surplus funds to the extent of USD 5,00,000/- for a period of 3 months.
The cost of the funds to the bank is 4% p.a. It proposes to invest these funds in London, New York or
Frankfurt and obtain the best yield, without any exchange risk to the bank. The following rates of
interest are available at the three centres for investment of domestic funds there at for a period of 3
months.

London 5 % p.a.

New York 8% p.a.

Frankfurt 3% p.a.
The market rates in London for US dollars and Euro are as under:

London on New York

Spot 1.5350/90

1 month 15/18

2 month 30/35

3 months 80/85

London on Frankfurt

Spot 1.8260/90

1 month 60/55

2 month 95/90

3 month 145/140

At which centre, will be investment be made & what will be the net gain (to the nearest pound) to the
bank on the invested funds? (8 Marks) (November 2013)

Question 47

You as a dealer in foreign exchange have the following position in Swiss Francs on 31st October, 2009:

Swiss Francs

Balance in the Nostro A/c Credit 1,00,000

Opening Position Overbought 50,000

Purchased a bill on Zurich 80,000

Sold forward TT 60,000

Forward purchase contract cancelled 30,000

Remitted by TT 75,000

Draft on Zurich cancelled 30,000

What steps would you take, if you are required to maintain a credit Balance of Swiss Francs

30,000 in the Nostro A/c and keep as overbought position on Swiss Francs 10,000? (7 Marks)