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

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27.
ans : (a)

Reason: Number of days = 30 + 30 + 30 + 30 + 26 = 146

Accrued interest = (146/360) x 0.08 = 3.24%
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28.
ans : (b)

Reason: options (a) and (b) are valid as per article seven of URC 522.
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29.
ans : (d)

Reason: If the exchange rate movements of 2 currencies are negatively correlated, then a firm cannot offset the risk arising from a long position in 1 currency with a short position in the identical currency.
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30.
ans : (d)

Reason: The 1 month interest rate after two months is expected to be

=

r =

r = 4.77%.
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part B : issues

1. a. Rs/£ = 84.70/85.00

Rs/$ = 45.75/45.80

The non-arbitrage condition is

($/£) bid < ( Rs./ £ )ask x ($/Rs.) ask and

($/£) ask > (Rs./ £ ) bid x ($/Rs.) bid

($/Rs) ask = 1/45.75

(Rs/ £) ask =85.00

($/£) synthetic bid should be £ 85.00 ´ £ 1.8579

($/Rs) bid =1/45.80 = 0.02183

(Rs./£) bid = 84.70

$/£ synthetic ask should be ³ 84.70x ie, ³ 1.8493

b. Since the true cross currency bid rate does not fulfill the non-arbitrage condition, an arbitrageur is able to make risk less profit. presume that he has Rs.1 lakh with him. He will buy Pound for rupee .He will get pound 100000/85 = 1176.47, Immediately will sell pound for dollar at the cross currency bid rate of $1.8590/£ to get 1176.47 ´ 1.8590 = $2187.05.

When the above dollar is sold for rupee he will get Rs.100058 (2187.05 ´ 45.75)

Arbitrage profit =100058 – 100000 = Rs.58.

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2. Suppose swap is done at the spot rate if Rs./AED 12.15. The bank borrows AED 1.6 million at 3.5% for eight months and delivers it to the customer. The bank will invest the rupee amount received from the customer at 5% for eight months.

Rupee inflow = 1.6 ´ 12.15 = Rs.19.44 million

Rupee receivable after eight months = = Rs.20.09 million

AED amount to be repaid after eight months = = Rs.1.64 million

The bank will break-even if it charges a rate of = 12.25 rupee per AED

Since the bank wants to maintain a forward margin of 0.5%, thus towards the forward leg it will quote = 12.19. So, swap margin is four paisa.

Earning:   Approval pending.