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

Since the returns on investment in $ are more to cover the repayment of Rupee loan with interest, there is scope for covered interest arbitrage. Now, if we borrow $ 100 for three months, convert into Rupees at spot rate and invest for three months and after three months convert Rupees into $ at forward buying rate to repay the $ loan with interest

$ loan to be repaid =
= $ 101.00

Rupees received at spot = 100 ´ 45.30

= Rs.4530

Rs. received after three months = 4530
= Rs.4575.30

Convert Rs. into $ at three months forward ask rate to get $ =
= $ 98.93

Since the $ loan to be repaid is more than the $ proceeds from Rupee investment, there is no scope for covered interest arbitrage.

Hence, arbitrage profit of Rs.1.14 can be made by borrowing Rs. 100 and investing this money in $ market.

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3. The bank can organize a loan by doing the subsequent

i. Borrow dollars

ii. Do a dollar – AED swap. That is, sell dollars against AED and buy dollars three month forward and

iii. Loan AED to the MNC

Bank borrows = $2.7226 million to buy AED 10 million to loan to MNC

At maturity it has to buy back the identical amount of dollars at a rate of 3.6745. In addition to this, it has to pay interest on dollar loan, which it must recover from the customer at out right forward merchant rate of 3.6775. The amount of interest in $ is

= $0.0245

At three month forward rate interest amount

= AED 0.0245 ´ 3.6775

= AED 0.09010

The amount of AED, the bank must recover from the MNC

= + 0.09010

= 10.00408 + 0.09010 =AED 10.09418

Hence the breakeven rate of interest = = 3.77%.

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4. a. Profit at the current exchange rates

=

=

= Rs.21.94 lakhs

Profit after the change in exchange rates

=

=

Earning:   Approval pending.