FOREIGN

EXCHANGE
PARVESH AGHI
Question 1
Citi Bank quotes JPY/ USD 105-106.5, and Honk Kong Bank quotes
USD/JPY 0.0090-­0.0093.
(a) Are these quotes identical?
(b) If not, is there a possibility of arbitrage?
(c) If there is an arbitrage opportunity, how would you profit from it?

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA Monday, September 07, 2020 2

Solution
(a) No, Citi Bank’s quotes imply USD/ JPY 0.00939 - 0.00952. (HKB
USD/JPY 0.0090-­0.0093. )
(b) Since both rates quoted by Citi Bank exceed those offered by Hong Kong
Bank, there is an arbitrage opportunity.
(c) Buy JPY from Hong Kong Bank at USD/JPY 0.0093 and sell them to Citi
Bank at USD /JPY 0.00939.
Equivalently, buy USD from Citi Bank at 106.5 and sell them to Honk Kong at
107.5269 . ( HKB : JPY / USD 107.52 -111.11)

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA Monday, September 07, 2020 3

Question 2

Given
US$1 = ¥ 107.31
£ 1 = US$1.26
A$ 1 = US$ 0.70
(a) Calculate the cross rate for pounds in yen terms
(b) Calculate the cross rate for Australian dollar in yen terms
(c) Calculate the cross rate for pounds in Australian dollar terms
(a) Calculate the cross rate for pounds in yen terms

 1£ =?¥
US$1 = ¥ 107.31 ( European terms)
£ 1 = US$1.26 ( American terms )

= 107.31 x 1.26
£1= ¥135.21

Monday, September 07, 2020 5

(b) Calculate the cross rate for Australian dollar
in yen terms

 
A$1= ¥?
US$1 = ¥ 107 .31 European terms
A$ 1 = US$ 0.70 American terms

= 107.31 x .70= 75.12

A$1 = ¥ 75.12

Monday, September 07, 2020 6

(c) Calculate the cross rate for
pounds in Australian dollar terms
₤  1 = A$ ?

A$1= US$ 0.70

US $ 1= A$ 1.4285 European terms

£1 = US$1.26 American terms

= 1.4285 x 1.26 = 1.80

£ 1= A$ 1.80

Monday, September 07, 2020 7

Question 3
XYZ Global Ltd is expecting to receive a sum of £ 5,00,000 after 6 months. The company decided to go for future
contract to hedge against the risk. The standard size of future contract available in the market is £ 1000. As on date
spot and futures £ contract are quoting at Rs 97.50 & Rs 99.00, respectively. Suppose after 6 months the company
closes out its position futures are quoting at Rs96.30 and spot rate is quoting at Rs 96.50. You are required to
calculate effective realization for the company while selling the receivable. Also calculate how company has been
benefitted by using the future option.
Solution

The company can hedge position by selling future contracts as it

will receive amount from outside.

Number of Contracts = £5,00,000 / £1000 = 500 contracts

Gain by trading in futures = (Rs99 – Rs 96.30) £ 5,00,000= Rs

13,50,000

Net Inflow after 6 months = Rs 96.50 x£ 5,00,000+ 13,50,000 =

Rs 4,82,50,000 + 13,50,000 = Rs 4,96,00,000

Effective Price realization Rs 4,96,00,000/ £ 5,00,000 = Rs

99.2

9
 Question 4
(a) If exchange rate in Mumbai inter – bank market is US $1 = Rs 75.2550/ 2600
and in London inter-bank market is US $ 1= £ 0.7945/ 0.7974.
What will be the direct quote between the Rupee and the British Pound in India ?
 
(a) The rate between Japanese ¥ and the U.S. $ is ¥ = 119.15 - 121.85 and the rate between the euro and the
U.S $ is $: € = 0.8021 - 0.8033.
What will be the direct quote between the yen and the euro in Japan?
Solution 4 (a)
(a) If exchange rate in Mumbai inter – bank market is US $1 = Rs 75.2550/ 2600
and in London inter-bank market is US $ 1= £ 0.7945/ 0.7974.
What will be the direct quote between the Rupee and the British Pound in India ?

US $ 1= Rs 75.2550 – 75.2600
US $ 1 = GBP .7945 – 0.7974
GBP1 = US $ 1.2540 1.2586
Therefore : GBP 1 = 75.2550 X 1.2540 & 75.2600 x 1.2586
GBP1 = Rs 94.37 & 94.72
Solution 4 (b)
Bid Asked

US$1 = Yen 119.15 – 121.85

US $ 1 = Euro .8021 - .8033

Euro 1= US $ 1.2448 – 1.2467

Therefore

Euro 1 = Yen 119.15 x 1.2448 – 121.85 x 1.2467

Euro 1 = Yen 148.31 – 151.91

The lower rate is the bid, and the higher rate is the ask. Therefore, the rate between yen and euro is €:¥ = 148.31 –
151.91

Monday, September 07, 2020 12

Question 5
The current spot exchange rate is $1.35/£ and the three-month forward rate is $1.30/£. According to your analysis
of the exchange rate, you are quite confident that the spot exchange rate will be $1.32/£ in three months.
Assume that you would like to buy or sell £1,000,000.
a. What actions do you need to take to speculate in the forward market? What is the expected dollar profit (loss)
from speculation?
b. What would be your profit (loss) in dollar terms if the spot exchange rate turns out to be $1.26/£.
Solution 5
a. If you believe the spot exchange rate will be $1.32/£ in three months, you should buy £1,000,000 forward for
$1.30/£. Your expected profit will be: $20,000 = £1,000,000 x ($1.32 -$1.30).

b. If the spot exchange rate turns out to be $1.26/£ in three months, your loss from the long position will be: -
$40,000 = £1,000,000 x ($1.26 -$1.30).
Question 6

The US dollar is selling in India at Rs 74.86 . If the interest rate for a 6 months borrowing in India is 8% per
annum and the corresponding rate in USA is 2%.
(i) Do you expect that US dollar will be at a premium or at discount in the Indian Forex Market?
(ii) What will be the expected 6-months forward rate for US dollar in India? and
(iii) What will be the rate of forward premium or discount?
 Solution 6
 

Under the given circumstances, the USD is expected to quote at a premium in India as the interest rate is
higher in India.

=
Where: Rh is home currency interest rate, R f is foreign currency interest rate, F is end of the period forward rate, and S is
the spot rate.

Therefore

Fwd rate = 74.86. x = Rs 77.08

Rate of premium = x x 100 = 5.93%

© THE INSTITUTE OF CHARTERED ACCOUNTANTS OF INDIA Monday, September 07, 2020 16