Institute of Chartered Financial Analysts of India (ICFAI) University 2006 Certification Finance International and Trade – I - exam paper

Hence, choice (a) is the accurate ans.
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30.
ans : (c)

Reason: The international exchange value of the U.S. dollar is determined by the international demand and supply for dollars.

Hence, choice (c) is the accurate ans.
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part B : issues

1. BOI entered into an agreement to sell ¥ two million in 3-month forward at 39.10. The bank covers the transaction with a contract to buy the ¥ in the interbank market 3-months forward.

On early delivery date the bank sells ¥ to the customer at the agreed upon forward rate of 39.10, and buys the identical in the spot market at 39.30. Due to early delivery there is an additional cash outflow to the bank on 1/9/2005 to the extent of difference ranging from the spot buy and forward sell contract rate i.e. Rs. (39.10-39.30) = Rs.0.20. Since, this additional cash outflows will be for a period of 62 days, BOI will receive interest on this amount at its PLR rate.

Interest amount receivable from the customer = = Rs.81.53

The bank will do a swap by buying ¥ in the spot market on the day of early delivery and selling forward. In this process, the bank would square off the forward contract it had entered to cover itself for the original contract. That is, it buys spot at 39.30 and sells forward at 39.56. The difference ranging from these 2 i.e. Rs.0.26 the bank will pay to the customer.

Total amount payable to the customer = = Rs.5200

Therefore, the net amount payable to the customer is Rs. (Rs.5200 – 81.53) = Rs.5118.47.

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2. Suppose we borrow 100 Rupees for three months, convert it in to $ and invest for three months and after three months convert $ into Rupees at forward rate and repay the Rupee loan.

Rupee loan to be repaid = 100
= Rs. 101.50

$ received at spot =
= $ 2.2051

$ received after three months = 2.2051
= $ 2.2216

Convert $ into Rupees at three months forward bid rate to get Rupees = 2.2216 ´ 46.20

= Rs.102.64

Earning:   Approval pending.