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

You are needed to obtain out the interest rate on concessional loan to make the project viable

(10 marks)
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3
Consider the subsequent exchange rates :


US $ Equivalent

US Market


Singapore Dollar (S$) Spot
0.6330/33

three – month forward
0.6357/60

Euro (€) Spot
1.2818/21

three – month forward
1.2898/01







Equivalent Singapore $

Singapore Market


Euro (€) Spot
2.0379/82


You are needed to

a. Verify whether there is a possibility of triangular arbitrage to exploit the difference ranging from S$-Euro cross rates in the U.S. market and the S$-Euro rates in the Singapore market. Indicate clearly which currency you would buy/sell and in which market.

If you have $1 million, compute the profit or loss from the triangular arbitrage.

b. calculate what is the 3-month risk less interest rate in the U.S. (expressed as effective annual rate), if risk less rate of interest in the Singapore market for 3-month is 3.25% p.a. compounded annually?

(6 + five = 11 marks)
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4
A Finance company in Mumbai proposes to invest rupee funds equivalent to €10 million for 1 year in London market. The return on investment over the period of investment will be 8%. The current exchange rates are as follows:

Rs./€
Spot
53.15/53.20


1- year forward
53.25/53.30


A foreign bank has agreed to offer €10 million at a rate of Rs.53.10/€ and swap the identical amount at Rs.53.20/€ after 1 year. The rupee cost of the funds to the company is 7%.

You are needed to compute the true returns earned under forward cover and swap deal and suggest the company whether it should go for the simple forward cover or accept the foreign bank’s offer.

(8 marks)
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5
Kwality Oils Ltd., an exporter of coconut oil in Kochi has submitted a 45 days bill for Can$ 600,000 drawn under an irrevocable LC for negotiation. The company asked its banker to retain 50% of the bill amount under EEFC (Exchange Earners Foreign Currency) account.

The rates for US$ in the inter-bank market are quoted as under:

As on 04.04.2006

Rs./US$ Spot 44.51 / 44.61

1-month forward 08/09

2-months forward 16/17

Earning:   Approval pending.