Group 1

IF

Adit Harchandani (PGP-14-085)

Jay Seksaria (PGP-14-190)
Suhail Bhansali (PGP-14-227)
Svati Goyal (PGP-14-231)
Vatsal Shah (PGP-14-250)

From the interbank market exchange rates (spot and forward) find out the appropriate
Spot /forward exchange rate for the specified transaction:
Currency

Spot
One month
5/6
20/30
12/11
40/42

Forward
Three month
15/16

Six month
30/32

EUR/USD
1.0740/45
GBP/USD
1.4850/55
USD/JPY
118.20/30
48/46
115/105
USD/INR
61.80/81
120/122
240/242
AUD/USD
0.7510/15
1. Tata Teleservices Mumbai will be importing equipment from Mitsubishi, Tokyo for
value of USD 25mn. SBI Mumbai will be quoting spot rate to them loading profit
margin of 0.5 paise (half paise). Find out the merchant rate and Rupee
equivalent after loading profit margin.
Merchant Rate: 61.81 +0.005 = 61.815
Rupee Equivalent: [25,000,000*61.815] = Rs. 1,545,375,000
2. In the same transaction how much JPY Mitsubishi will receive from their
bankers? Their bankers will be loading 0.005 JPY as their profit margin. Find
out the net JPY Mitsubishi will receive in this transaction.
Net JPY received by Mitsubishi: [25,000,000*(118.20-0.005)] = 2,954,875,000
3. S P Jain Mumbai wants to remit AUD to their Sydney office. Find out the spot
cross rate for AUD/INR and the Rupee equivalent. Ignore profit margin for the
bank.
To buy 1 AUD, requires [0.7515*61.81] = Rs. 46.45
Similarly, if one sells 1 AUD, one gets [0.7510*61.80] = Rs. 46.41
Spot Rate for AUD/INR: 46.41/45
Thus, if SP Jain remits X AUD to their Sydney office; the Rupee equivalent: Rs. X*46.45
1

Group 1

IF

4. L & T ltd will be repaying their JPY loan after three months. Company wants to
book 3 months FWD for their JPY/INR exposure. Please find out JPY/INR three
(3) months FWD. Ignore profit margin.
USD/INR 3-month FWD: [(61.80+1.20)/(61.81+1.22)] = 63.00/03
USD/JPY 3-month FWD: [(118.20-.48 )/(118.30-.46)] = 117.72/84
Thus, JPY/INR 3-month FWD: [(63.03/117.72)/(63.00/117.84)] = .5346/54
5. Siemens AG, Munich will be supplying equipment to Adani Power Ltd,
Ahmedabad for value of EUR 20mn. When Adani Power wanted their bank to
quote EUR/INR spot, bank has quoted INR 66.4000 without covering itself in the
market. Bank wants to cover this transaction in the market subsequently.
Interbank market rate is given in the above schedule. Find out whether the bank
will gain or lose at the time of covering itself in the market. Cover rate can be in
4 decimals.
The relevant rate for the bank to cover itself is EUR / INR ask rate (spot). Since a direct
rate is not available, we need to derive the cross rates for EUR / INR using USD as the
common currency. The same is as follows:
Ask EUR / INR = Ask EUR / USD * Ask USD / INR
=
1.0745 * 61.81
=
66.4148
The bank needs to procure the Euros at the rate of INR 66.4148. Since the bank has
already committed a rate of INR 66.4000, it would make a net loss of 0.0148 per EURO.
6. Vodafone UK will be settling their Tax liability in India next month in a
compromise deal with this new Govt. They propose to transfer GBP from UK to
India through Standard Chartered Bank. They intend to hedge this exposure by
booking FWD for GBP/INR one month. Find out the FWD exchange rate and
Rupee equivalent. Ignore profit margin for the bank.
GBP/USD 1-month FWD: [(1.4850+0.0020)/(1.4855+0.0030)] = 1.4870/1.4885
USD/INR 1-month FWD: [(61.80+0.40)/(61.81+0.42)] = 62.20/62.23
Thus, GBP/INR 1-month FWD: [(62.20*1.4870)/(62.23*1.4885)] = 92.4914/92.6294
FWD Exchange Rate of GBP/INR to hedge = 92.4914
7. Novartis India will be acquiring one of local Pharma companies. Take over price
is decided at USD 120 mn. On the basis of the expected future cash flow
company is planning to raise a loan in USD or CHF for six months. Interest rate
and FWD differentials are given below: (Ignore USD/INR leg)
USD/CHF spot
0.9010/15
USD/CHF 6 months FWD 50/45
USD Interest rate
1.5% (annualized)
CHF interest rate
0.25% (annualized)
2

Group 1

IF

Find out the best option. To raise loan in CHF or in USD?

Considering payment has to be done in USD,
1) If loan is taken in USD, Final rate = USD Interest rate = 1.5% (annualized)
Interest on 6 months = 120*1.5/200 = 0.9 mn
2) If loan is taken in CHF, Final rate = CHF Interest rate + Hedging cost
Hedging cost = (0.8960-.9015)/.9015 = 0.61%
Final rate = 0.25 + 0.61 = 0.86% (Annualized)
Interest on 6 months = 120*0.86/200 = 0.516 mn
Since cost of borrowing will be lesser in case of CHF loan, best option will be to raise
loan in CHF.
8. Please work out the forward exchange rate for 6 months for the following:
Currency pair

Spot rate

USD/INR
EUR/USD
GBP/USD

62.00
1.0800
1.4500

Forward rate
for 6 months
64.16
1.0827
1.4393

Interest rates for 6months (annualized)

USD
1.00%
EUR
0.50%
INR
8%
GBP
2.5%
FWD 6m USD/INR: [62.00*(8% - 1%)/2]/[1 + 1%/2] = 2.16
FWD 6m EUR/USD: [1.0800*(1% - 0.5%)/2]/[1 + 0.5%/2] = 0.0027
FWD 6m GBP/USD: [1.4500*(1% - 2.5%)/2]/[1 + 2.5%/2] = -0.0107
9. Bataan 2010, imports Steam Turbine Generator from Cummins Ltd for value of
USD 2,000,000 payment maturing after six months. Following is the exchange
rate and the interest rate prevailing in both the countries:
Currency Spot
USD/INR 61.80/81
USD/PH
43.10/12
P
Interest rate prevailing
annualized
USD
2.5%
INR
8%
PHP
10%

6 months FWD
220/222
160/162

6 months

Group 1

IF

a. What will be the PHP payable by the Bataan 2020 Inc and what will be the
Rupee equivalent Cummins India will receive if they cover themselves with
FWD.
PHP payable by Bataan: Ask rate of the FWD [43.12 + 1.62 = 44.74] * 2,000,000
So the amount would be PHP 89,480,000.
The rupee amount that Cummins India would receive: [2,000,000 * (61.80+2.20)]
So the amount would be Rs 128,000,000.
b. Please find out whether these companies can go through money market
operations or simply book forward contract. Which will be beneficial for
them?
For Batana,
If the company converts PHP 43.12 to a dollar
Then invest the dollar at the given rate for 6 months
Total PHP liability = 43.12*1.05 PHP for every dollar invested
Dollar holdings= 1.0125 for every dollar invested
So 1 dollar after 6 months costs 43.12*1.05/1.0125 PHP = 44.71 PHP
USD cost by booking the forward rate is 44.74 USD
Thus, Batana should go throuugh money market operations.
For Cummins India,
If the company borrows a dollar, it will be liable to pay 1.0125 dollar at the end of the 6month period.
With the 1 USD bought at the start, it can get 61.80 INR which it can then invest to get
61.80*1.04 INR= 64.27 INR
To get to 1 dollar of liability at the end of 6 months, it will have to borrow, convert it into
rupee and invest it such that it gets 63.47 INR at the end of 6 months.
Through forward it is able to book 64 INR.
Thus, Cummins India should book the forward contract.
*****