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

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3. Federal Bank entered into an agreement to buy S$ 3-m forward at 27.45. The bank covers the transaction with a contract to sell the S$ in the inter bank market 3-m forward.

On early delivery date the bank buy S$ from the customer at the agreed upon forward rate of 27.45, and sell the identical at the spot rate of 27.34. Due to early delivery, there is additional cash outflow to the bank on 14/11/2005 to the extent of difference ranging from the spot sell and forward purchase contract rate ie. Rs (27.45-27.34)=Rs. 0.11. Since the additional cash outflow is with the bank for 28 days ie. till the original contract date. The bank will charge interest on this amount at its one month borrowing rate (FEDAI rule)



The bank will do a swap by selling the S$ in the spot market on the day of early delivery and buying forward. In this process the bank would square off the forward contract it had entered into to cover itself from the original contract. That is it sells spot at 27.34 and buys forward at 27.70. The difference ranging from this 2 is Rs.0.36, the bank will recover from the customer. The swap loss can be recovered by Federal Bank at the time of early delivery or on the date of original contract due date.

Therefore the total amount to be collected from the customer is Rs. (36,00,000-6328.77) = Rs.3606328.77

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4. a. Nominal rate of return to Magnum Pension Fund



Or 2567.84 + 131.44 = 2537.31 (1 + r)

Or 2699.28 = 2537.31(1+ r)

Or r = 6.38%

Real rate of return to Magnum pension fund.

Hence the inflation should be adjusted. The inflation in U.K. should be considered to calculate the real rate of return.

That is

2493.05 + 127.61 = 2537.31 (1 + r)

or 2620.65 =2537.31 (1 + r)

or r = 3.28%

Real rate of return for an Indian investor.

The amount is invested in India itself; hence the exchange rate will not be considered. Inflation rate should be considered while computing the real rate of return.

Cash flow invested will grow by the end of the year to 5,000 = Rs.5175

Total inflow at the end of the year = 101100 + 5175

= Rs.1, 06,275

\Nominal rate = = 18.08%

Real return = = 12.46%

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5. Spot Rs/$ 46.07 / 46.11

6m forward 46.18 / 46.22

Earning:   Approval pending.