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

Spot Rs./$
45.30/35

Annualized Rs. interest rates for three months
4% / 6%

Annualized $ interest rates for three months
3% / 4%

3-month forward Rs./$
46.20/25


You are needed to verify whether there is any scope for covered interest arbitrage. Indicate clearly in which currency you will borrow/invest. What is the profit or loss from covered interest arbitrage?

(8 marks) < ans >

3. An American multinational corporation approached a Bank in London with a request to organize a three month loan of UAE Dirhan (AED) 10 million. At that time there is no active Euromarket in UAE Dirhan for borrowing and lending. However, there is active spot and forward market for US dollar and UAE Dirhan.

The subsequent rates are observed in the market:

Inter-Bank market

AED/ US $
Spot
3.6730/35


three month Forward
3.6740/45

Merchant quote (AED/US $)


three month Forward
3.6770/75

Interest rate

US$
three month
3.30%/3.60% p.a.


If the Bank agreed to lend to the customer you are needed to suggest how it will organize the loan without exposing to foreign exchange risk, and also the break-even rate of interest for the Bank.

(8 marks) < ans >

4. Ranka Exports in Mumbai exports washing machines to Australia by importing all the components from Sweden. The company is exporting 4,500 units at a price of AUS$ 200 per unit. The cost of imported components is SKr 550. The fixed costs and other variable costs per unit are Rs.1,000 and Rs.2,000 respectively. The cash flows in foreign currencies are due in 6 months. The current exchange rates are as follows:

Rs./AUS$
: 33.80/85

Rs./SKr
: 5.90/5.95


After 6 months the exchange rates (at the time of receipt and payment of foreign currency) turn out as follows:

Rs./AUS$
: 34.30/35

Rs./SKr
: 6.40/45


Required:

a. compute the loss/gain due to the transaction exposure.

b. Based on the subsequent additional information, compute the loss/gain due to transaction and operating exposure if the contracted price of washing machine is Rs.7,000.

· The current exchange rates change to

Rs./AUS$
: 34.00/05

Rs./SKr
: 5.70/75


· Price elasticity of demand of the product in Australia is estimated as 1.5.

Earning:   Approval pending.