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

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4.
Rupee out flow at spot rate for acquiring €10 million 10 × 53.20 = Rs.532 million

Rupee cost of funds = 532 × 0.07 = 37.24 million

Return from Investment = 10 × 0.08 million

= € 0.80 million

Total inflow = 10 + 0.80 = € 10.80 million

Rupee inflow if covered through forward market = 10.80 × 53.25

= Rs.575.10 million

Net gain = 575.10 – [500 + 37.24] = Rs.37.86 million.

Return = , say 7.12%.

If the company accepts foreign bank’s offer:

Initial rupee outflow = 10 m × 53.10

= 531.00 million

Rupee cost of funds = 531.00 × 0.07 = 37.17 million

Out of the total investment matured, € 10 million is to be paid back to foreign bank and will pay Rs. 53.20/€ and rest € 0.80 million can be sold through forward cover @ Rs. 53.25/€.

Rupee inflow from swap deal = 10m × 53.20 = Rs.532 million

Rupee inflow from forward cover = € 0.80m × 53.25 = Rs.42.60 million

Total rupee inflow after 1 year = 532 + 42.60 = Rs.574.60 million

Net gain = 574.60 – (531.00 + 37.17)

= 574.60 – 568.17 = Rs.6.43 million

Return =

The finance company should reject the bank’s offer, as the return is less.
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5.
(i) Exchange Rate quoted to the Company:

Usance of the bill and transit period come to 60 days i.e. 2 months.

US$/Rs. Spot rate = 44.51

Add: Premium for 2 months = + 0.16

= 44.67

Less: Exchange Margin. 0.1% = +0.0445

Bill Buying rate for US$ = 44.6255

In the Montreal Market US$ is quoted at discount, dollar selling rate for two months is

Can.$/US $ spot ask rate = 1.1675

Less : Discount for 2 months = (-) 0.0026

Can.$/US$ ask rate = 1.1649

Can.$ Bill buying rate : (Rs/US$)bid ´

=

= 38.3084

Exchange Rate quoted to company = Rs./Can.$ 38.3084.

ii. Rupee Inflow to the Company:

Can. $ 3,00,000 @ Rs. 38.3084, the exporter will receive 1,14,92,520

Less: Interest for 45 days Usance period + 15 days transit period

@ 8.5% p.a (-) 1,62,810

Net Cash inflow to the Company Rs.1,13,29,710

Earning:   Approval pending.