CA FINAL

STRATEGIC FINANCIAL MANAGEMENT

FOREX
TEST 5

Question 1 :

Proactive Ltd. imports some specialty instruments from Japan and exports the finished
product to US. The company has a payable of ¥ 500 million and a receivable of $10
million three months hence. The following exchange rates are available in the market:
Rs./$ Rs./¥
Spot 46.65/85 0.4065/0.4115
3m forward 46.90/15 0.4218/0.4268
The current interest rate scenario is as follows:
Maturity Rupee (%) Dollar (%) Yen (%)
3m 8.0/9.0 6.00/6.50 0.4/0.5
The company is considering to cover the exposures either through the forward market
or through the money market.
You are required to advise the company which alternative should be better for covering
both the payables and receivables.

Question 2 :

M/s H.P. Agro Exports Ltd., New Delhi, imports raw materials viz., cans, sugar,
pulp etc from China and Korea and exports processed foods to European
countries after processing. The company has receivables of € 200,000 and payables of
US$100,000 three months from now. The following exchange rates are available in the
market:
Exchange rates Rs/Euro Rs/$
Spot 58.85/90 45.96/98
Three month forward 58.96/98 46.00/02
The current interest rates (per annum) are as under
Maturity Rupee (%) Euro (%) US$ (%)
3 months 7.00 / 8.00 3.00 / 3.20 5.00 / 5.20
The company is considering to cover the exposures either through the forward market
or money market.
You are required to advise the company as to which alternative should be better for
covering both the payable and receivables.

SANJAY SARAF SIR 1

Question 3 :

A Foreign Institutional Investor from U.K. proposes to invest £ 1 million in an

emerging market. After a careful analysis of future prospects, India and Hong Kong are
short listed. For the next year, which is also the holding period for the FII, expected
rates of returns are 15% and 12% in Indian and Hong Kong markets respectively.
Withholding tax rates applicable on the returns earned are 15% in India and 12% in
Hong Kong. Other information available with the FII includes:
Current exchange rates
Rs./£ 69.50/70
HK $/£ 11.15/18
Expected inflation for the next year
U.K. – 2%
India – 4%
Hongkong – 3%
You are required to find out the rate of return in India and Hong Kong in £ terms.
Assume purchasing power parity holds good in both the countries.

Question 4 :

A US Institutional Investor decided to invest in a Indian security of b = 1.20 and

standard deviation 15%. The return on the market portfolio is 15% and risk-free rate is
8% in India. Indian rupee in expected to depreciate by 4% in the next one year.
You are required to calculate expected return in dollar if the FII holds the investment
for one year.

Question 5 :

A Foreign Institutional Investor (FII) is planning to invest $10 million in an Indian

security with a beta of 1.40 and standard deviation of returns 10% p.a. The holding
period of investment will be one year. The current rupee dollar exchange rate is
Rs.48/$. The FII expects the rupee to depreciate against dollar by 4% over next one-
year period, with a volatility of 8% p.a. The expected return from the market portfolio
in India is 12% p.a., and the standard deviation of returns on the market portfolio is 9%
p.a. Correlation between the return on the security and the exchange rate is 0.15. The
risk free rate of return in India is 6% p.a.
You are required to calculate the expected return and risk for the FII.

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Question 6 :

A foreign institutional investor (FII) proposes to invest $ 5 million in an Indian security

with a beta of 1.25 and standard deviation of returns of 9%. The holding period of
investment will be one year. The current rupee-dollar exchange rate is Rs.43.50/$.
The expected appreciation of rupee against dollar over the period is 2% with a
standard deviation of 6%. The expected return from the market portfolio in India
is 16% and the correlation between the return on security and the exchange rate is
0.66. The risk free rate of return in India is 5%.
You are required to calculate the expected return and risk for the FII.

Question 7 :

Mr. Robinson, an Australian investor is very much interested in investing Rs.1 million
in the pharmaceutical sector in India. He decides to invest in the scrip of Morepen Labs
Ltd. which is listed on BSE and the details of scrip are given below
Beta of the security : 1.65
Variance of returns : 25(%)2
Appreciation of Australian dollar against rupees is 3% with a variance of 10(%) 2.
Return on BSE index is 12% annualized and return on long dated Indian Government
securities is 6.5%. Assume that the correlation between the return on the scrip and Rs /
AUS$ exchange rate is zero.
You are required to estimate the expected return and risk of Mr. Robinson, if his
holding period is one year.
Question 8 :

A US investor chose to invest in Mumbai sensex for a period of one year with a view to
earn a nominal return of 12% on the investment. The relevant information is given
below.
Size of the investment $ 5000000
Spot rate 1 year ago Rs/$ 46.50 / 55
Spot rate now Rs/$ 43.50 / 55
Sensex one year ago 5855
Sensex now 6087
Inflation in U.S. 2%
Inflation in India 6%
You are required to
a. Compute the nominal return to the US investor
b. Real return for the US investor.

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 c. Nominal return for the Indian investor.
d. Compute the real return to an Indian investor in Sensex.

Question 9 :

An Indian investor purchased securities on the New York stock exchange when the
exchange rate was Rs.46.50. The exchange at the end of one year was Rs.45.75.
If the percentage returns on American securities is
a. –20%
b. 50%, compute the net return to the Indian investor

Question 10 :

The treasurer at an Indian company requires Rs.10 million for six months. He is
exploring various options of financing and has collected the following information:
Rs./$ Rs./£
Spot 46.90/95 65.35/40
6m forward 70/90 paise 90/100 paise
Expected spot rate after 6m 47.50/55 66.90/95
Interest rate
Rs. $ £
6 months 12.00% 4.00% 5.00%
You are required to advise the treasurer in which currency to borrow, if he
a. Covers the exchange risk in forward market
b. Keep the open position.

Question 11 :

An Indian Company based at Mumbai needs short term funds of Rs.50 million for a
period of 3 months. The company collected the following information from its banker:
Rs./$ Rs./£
Spot 48.50/55 74.05/10
3 months forward 45/50 85/90
3 months Interest rates (p.a.)
Rs : 9%
$ : 4%
£ : 6%

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You are required to calculate the annualized effective cost of borrowing,
a. If the company borrows in USD and
i. Covers the exchange rate risk through forward market
ii. Keeps the position open and spot rate after 3 months turns out to be Rs/$
48.90/95.
b. If the company borrows in pounds and
i. Covers the exchange rate risk through forward market
ii. Keeps the position open and spot rate after 3 months turns out to be Rs/£
74.75/80.

Question 12 :

Suppose that on January 01, 2003, the cost of borrowing dollars for the year was 8%.
During the year, inflation rates in Euro zone and US were 3% and 2% respectively. If
Euro/$ quotes available in the market were:
Exchange rate on the date of availing the loan (01.01.2003) : Euro 0.90/$
Exchange rate on the date of repaying the loan (31.12.2003) : Euro 0.78/$
You are required to calculate the real cost of borrowing dollars in Euro terms for the
year.

Question 13 :

An Indian company, in its bid to improve the scale of operations, required a loan of US
$300,000. The company’s banker agreed to arrange the loan with a condition that the
loan is to be repaid with interest, by making equated annual installments of US
$112,000 at the end of each year for a period of three years after receipt of the loan. The
current exchange rate of US dollar is Rs.47.70. The inflation rate in India is 4% and
that in U.S. is 2.5%. The expected appreciation of rupee in the first year is 1% and for
next two years expected depreciation of rupee is 2% and 3% respectively, on year-on-
year basis.
You are required to determine the effective cost of funds in rupees to the company.

Question 14 :

An Indian software company had approached State Bank of India (SBI) for forward sale
of £100,000 delivery on May 31, 2001. The bank had quoted a rate of Rs.65.60/£ for the
purchase of pound sterling from the customer. But on 31st May, the customer informed
the bank that it was not able to deliver the pound sterling as anticipated receivable
from London has not materialized and requested the bank to extend the contract for
delivery 31st July.

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The following are the market quotes available on May 31, 2001:
Spot Rs/£ 66.60/65
1m forward 20/25
2m forward 41/46
3m forward 62/68
You are required to find out the extension charges payable by the software company.

Question 15 :

An Indian importer has a payable of C$ 5,00,000 due on 31.3.2002. On 01.01.2002, the

importer covers the payable through forward buying of C$ at Rs.30.34 from his banker.
On 31-3-2002, he requests the banker to extend the contract till 30-4-2002. The
exchange rates as on 31-3- 2002 are
Rs./C$ Spot 30.54/63
1 month forward 30.56/68
You are required to find out the net cash outflow for the importer. Also state how the
bank will cover this extension of forward contract.

Question 16 :

Deccan Electronics Ltd., in Noida Export processing zone, exports split air conditioners
to Germany by importing all the components from Singapore. The company is exporting
2,400 units at a price of Euro 500 per unit. The cost of imported components is S$800
per unit. The fixed costs and other variable costs per unit are Rs.1,000 and Rs.1,500
respectively. The cash flows in foreign currencies are due in six months.
The current exchange rates are as follows
Rs./Euro : 51.50/55
Rs./S$ : 27.20/25
After six months the exchange rates (at the time of receipt and payment of foreign
currency) turn out as follows:
Rs./Euro : 52.00/05
Rs./S$ : 27.70/75
a. You are required to calculate the loss/gain due to the transaction exposure.
b. Based on the following additional information, calculate the loss/gain due to
transaction and operating exposure if the contracted price of split air conditioner is
Rs.25,000.

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  The current exchange rates change to
Rs./Euro : 51.75/80
Rs./S$ : 27.10/15
 Price elasticity of demand is estimated as 1.5
 Payments and receipts are to be settled/received at the end of sixth months.

Question 17 :

Poomphar Electronics Ltd in Chennai exports refrigerators to Belgium by

importing all the components from South Korea. Imports are invoiced in Hong Kong
dollars and exports in Euro. The company is exporting 6,000 units at a price of
Euro 165 per unit. The cost of imported components is HK$ 750. The fixed costs
and other variable costs per unit are Rs.1,200 and Rs.2,500 respectively. The cash
flows in foreign currencies are due in six months. The current exchange rates are
as follows:
Rs./Euro : 59.60/62
Rs./HK$ : 5.96/5.98
After six months the exchange rates (at the time of receipt and payment of foreign
currency) turn out as follows:
Rs./Euro : 60.30/32
Rs./HK$ : 6.23/25
You are required to:
a. Calculate the loss/gain due to the transaction exposure.
b. Based on the following additional information, calculate the loss/gain due to
transaction and operating exposure if the contracted price of washing machine is
Rs.9,500.
 The current exchange rates change to
Rs./Euro : 59.85/87
Rs./HK$ : 6.00/02
 Price elasticity of demand of the product in Germany is estimated as 2.5.
 Payment and receipts are to be settled/received at the end of six months.

Question 18 :

Techinfo Ltd. has imported speciality computer equipments worth US$ 250,000 from a
company in US. The amount due for the imports is payable after 3 months. Mr. Garg,
the treasury manager of Techinfo has collected the following market quotes:
Exchange rates:
Spot Rs./$ 47.15/47.30

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Forward 3 month 55/60
Interest rates (p.a.):
Dollar (3 months) 6.00% / 6.50%
Rupee (3 months) 10.00% / 11.00%
The supplier of the equipments has offered a discount of $ 5000 if the payable is settled
at the current date. Mr. Garg is reviewing the following alternatives to settle the
payable:
i. Cover through forward market
ii. Cover through money market
iii. Avail the cash discount of $ 5000 by taking a bridge loan at 9% p.a. from a lending
institution.
You are required to suggest Mr. Garg the best alternative to settle the payable.
Question 19 :

United Pharma Ltd. (UPL) has acquired an export order to export Rs.10 million of
formulations to a European company. UPL is also planned to import bulk drugs worth
Rs.5 million from a company in UK. The proceeds of the exports will be realized 3
months from now and the payment for imports will be due after 6 months from now.
The invoicing for these exports and imports can be done in currencies dollar, euro or
sterling at company’s choice.
The following market quotes are available:
Spot Rs/$ 47.10 / 47.20
Rs/Euro 43.15 / 43.20
Rs/£ 68.65 / 68.75
Annualized Premium
$ 6%
Euro 5%
£ 4%
You are required to advice the company about the invoicing currency.

Question 20 :

M/s. Gemini Hitech plans to expot software products to USA worth Rs.10 million.
Sister concern of Gemini Hitech, Leo Systems, plans to import equipment from
Germany worth Rs.4 million.
Export proceeds of M/s. Gemini Hitech will be realized 3 months from now. Leo
Systems have to make payment 6 months from now.
The market rates are:
Spot Rs. / $ : 48.20 / 22

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 Rs. / Euro : 48.00 / 02
Rs. / £ : 75.25 / 27
Currency $ £ Euro
Annualized Premium 4% 3% 2%
The invoicing can be made in any of the currencies for the exports and imports.
Advice the companies about the currency of invoicing.

SANJAY SARAF SIR 9