Ch.1. Foreign Exchange Exposure and Risk Management - Exp and Sol

CA FINAL
STRATEGIC FINANCIAL
MANAGEMENT
[EXPLANATIONS AND SOLUTIONS]

VOLUME - I
PROF.RAHUL DANAIT
8070 400 700 online.jkshahclasses.com

CA – FINAL
FOREIGN EXCHANGE
1
EXPOSURE & RISK
MANAGEMENT
Video 1
Spot Rates
1. Spot Rates in the Currency Market reflect the Relationship between two
currencies in Today‟s terms.
2. It helps us understand what is the value of one unit of a particular currency in

relation to another currency.
3. Let‟s say a Bank today quotes 1£ = `100. We can then understand the
following equations:
1 £ = ` 100
50 £ = ` 5,000
` 6,000 = £ 60
Video 2
Q.1. (a) 1 $ = BP 0.62

100 $ = BP 62
(b) 1 $ = NG 1.9
? $ = NG 50
 with NG 50, we can buy $ 26.32
Strategic Financial Management 1 Forex

CA – FINAL
(c) 1$ = SK 6.4
40$ = SK 256
(d) 1$ = SF 1.50
? = SF 200
 With SF 200, we can buy
$133.33
(e) 1$ = IL 1300
10 $ = IL 13,000
(f) 1$ = JY 140
?$ = JY 1000
 $ 7.14
Video 3
Currency Risk
Risk – Uncertainty caused by future
Currency Risk (or Transaction Risk) : Uncertainty caused by Exchange Rate

fluctuation to a person to whom Foreign currency is either Receivable or Payable.
Risk Hedging Tools
1) Forward Cover 1) Currency Future

2) Money Market Hedging 2) Currency Options
3) Leading 3) Currency Swaps
4) Netting

CA – FINAL
Video 4
Product and Price
1. Every quote has two aspects – Product and Price
2. The quote is always of the product.

1 £ = ¥ 500
This is a quote of Pound, expressed in terms of Yen.
3. 1$ = ` 100, Product = 1 $, price = `100

This is a quote of Dollar expressed in terms of Rupees.
The currency whose unit is either 1 or 100 is the Product and the other
currency is the Price.
4.1 SGD = AUD 12
 
Product Price
Video 5
Direct and Indirect Quotes
1$ = ` 100  Direct Quote for India

If the product is Foreign currency and Price is in Home currency, it is a
DIRECT QUOTE FOR HOME.
Thus,
Product = 1 Unit of FC
Price = Expressed in HC

DQ for Home

CA – FINAL
But simply, to Identify whether a quote is a DQ or not, just check the Price.
The quote is a DQ for that Country whose Currency is in the Price.
1 SGD = AUD 12
 This is a DQ for Australia
`1 = $ 0.01 DQ for USA / Indirect Quote for India

1
 IDQ =  Reciprocal of DQ 
DQ
1 £ = ¥ 500  DQ for Japan, IDQ for UK

1 ¥ = £1/500 or £ 0.002  IDQ for Japan, DQ for UK
Video 6
Q.2. Quote
Quote Product Price Reciprocal Quote
Status
1 ZAR = ` 5.34 ZAR ` DQ 1` = ZAR 0.1873
1 ` = SEK 0.1623 ` SEK IDQ 1SEK = ` 6.164
1 £ = ` 72.76 £ ` DQ 1` = £ 0.0137
1` = SAR 0.0737 ` SAR IDQ 1SAR = ` 13.5685

CA – FINAL
Video 7
Q.3. Quote Product Price Quote Reciprocal Quote

Status
1 £ = $ 1.43 £ $ IDQ 1$ = £ 0.6993
1 CHF = ¥ 87 CHF ¥ DQ 1¥ = CHF 0.0115
UAE CHF DQ 1CHF = UAED

1UAED = CHF 0.31
3.2258
1 MR = SGD 0.4173 MR SGD DQ 1SGD = MR 2.3964
Video 8
Bid, Ask and Spread
Bank quotes 2 Rates/ Prices for the same Product: One Price at which the Bank Buys
the Product and the Second Price at which the Bank Sells the Product.
This is called as a 2 way quote, which is explained below:
1 $ = ` 50 – 55
1 $ = `50 1 $ = `55
Bank Buys 1$ @ ` 50 Bank SELLS 1$ @ `55
BID Rate of $ in terms Ask Rate (or offer Rate)

of ` of $ in terms of `
Spread = Ask Rate – Bid Rate

= 55 – 50
= ` 5 per $
CA – FINAL
Video 9
Q.4. DQ DQ
Particulars 1 OMR 1£
= ` 130 – 132 = ¥ 141 – 145
(a) The country where the quote is India Japan
made
(b) Bid 130 141
Ask 132 145
Spread 2 4
(c) For the Ask Price :
(i) Currency being bought by bank Rupees Yen
(ii) Currency being bought you OMR Pound
(d) For the Bid Price :
(i) Currency being bought by bank OMR Pound
(ii) Currency being bought by you Rupee Yen
Video 10
Q.5. 1 £ = ` 72.70 – 73.25

(a) Bank buys 1 £ @ ` 72.70 and sells 1 £ @ `73.25
Therefore, the Bid Rate of £ = ` 72.70
Ask Rate of £ = ` 73.25
(b) Spread = Ask Rate – Bid Rate

= ` 73.25 – 72.70
= ` 0.55 per £
(c) We want to buy £,

 Bank will sell £.
The Relevant Rate will be Ask Rate of £ in terms of `
1 £ = ` 73.25
CA – FINAL
 To purchase £ 250,
We need to pay £ 250  73.25
= `18,312.50
(d) We will sell £ , bank will buy £

 The Relevant Rate will be Bid Rate of £ in terms of `
1 £ = `73.65 – 73.92;
Bid Rate = `73.65
 We will receive £ 23  73.65
= ` 1,693.95
Video 11
IDQ for Bid and Ask
1$ = ` 50 – 55  DQ for India
1 1
1` $ –
50 55 WRONG
1 1
1` $ –
55 50 IDQ for India
`1 = $ 0.0182 – 0.02
 
Bid Rate of Ask Rate of
` in terms of ` in terms
$ of $
Video 12
Q.6. 1 £ = ` 70 – 72
1 1
1`  £ –
72 70
1 `= £ 0.0139 – 0.0143
CA – FINAL
Video 13
Q.7. 1` / SGD = 33.5 – 33.75 i.e. 1 SGD = ` 33.50 – 33.75

(a) We want to buy SGD,
 Bank will sell SGD
 The relevant rate will be AR of SGD in terms of `
1 SGD = ` 33.75
 To buy 7,500 SGD,
We need to pay 7,500  33.75
= ` 2,53,125
(b) We want to sell SGD,

 Bank will buy SGD
 The relevant rate will be BR of SGD in terms of `
1 SGD = ` 33.5
 On sale of 12000 SGD,
We will receive 12,000  33.5
= ` 4,02,000
(c) 1SGD = ` 33.5 / 33.75

We want to buy `
 Bank will thus sell `
 The relevant rate will be AR of ` in terms of SGD
1` = SGD 1/33.5
 For purchasing ` 1,00,000
We need to pay
1
1, 00, 000   SGD 2985
33.5
(d) We want to sell ` .

Bank will thus buy `
 The relevant rate will be BR of `, in terms of SGD.
1 ` = SGD 1/33.75
 On sale of ` 50,000,
We will receive
1
50, 000   SGD 1481.48
33.75

CA – FINAL
Video 14
Q.8. 1$ = ` 51.3625 – 51.3700
ABN Canara Bank

Bank
 
Buy ` Sell `
 
BR of ` AR of `
We want to buy `. Canara bank will thus sell `

 The Revelant Rate will be the Ask Rate (AR) of ` in terms of $
 To purchase `15mn,
We need to pay
1
15 mn   $0.2920mn
51.3625
Video 15
Cross Currency Rates for Single Quote
Cross currency Rate is a rate created using two quotes.

Example : An Indian Exporter sells goods worth AUD 1,00,000 to an Australian
customer. He went to the bank to ask 1AUD = ` ? . Bank says quote is
not available. Thus, he will have to take help of a common currency.
1$ = ` 60, 1$ = AUD 3, 1AUD = `?
Step 1: Identify the common currency [$]
Step 2: Identify what you need [`/AUD]
Step 3 : Create a cross currency equation.
` ` $
 
AUD $ AUD
  
1AUD = ` __ 1$ = ` __ 1AUD = $__

CA – FINAL
 When you are creating the cross currency Equation 

 
 RHS side  DON‟T look at the quotes given 
` 1
 60   20
AUD 3
 1AUD = ` 20
Thus on sale of AUD 1,00,000;
We will receive 1,00,000  20
= ` 20,00,000
Logic: 1 $ = ` 60 3 AUD = ` 60
1 $ = AUD 3 1 AUD = ` 20
3 AUD  1$  ` 60
Video 15
Video 16
Q.9. 1$ = 5.9 FF
1 £ = $ 1.50
1£ = FF ?
FF FF $
 
£ $ £
= 5.9 1.50
= 8.85
 1 £ = 8.85 FF
Video 17
Cross Currency for Two way quotes – Exporter
Example : An Indian Exporter sells goods worth AUD 1,00,000 to an Australian

customer
1 AUD = ` __________ – __________ ?
Bank quotes 1$ = ` 60 – 63
1$ = AUD 3 – 5
CA – FINAL
Step 1 : Common currency = $
Step 2 : We want 1 AUD = ` __________ – __________

Revised Step 2  Identify what we need (Also in terms of Bid and Ask) ` / AUD
We want to sell AUD
 Bank will buy AUD
 Relevant Rate will be BR of AUD in terms of `
BR Product
` ` $
Step 3 :  
AUD $ AUD
  
1AUD 1$ 1AUD
= ` _______ = ` _______ = $ _______
  
BR of BR of $ BR of
AUD in in terms AUD in
terms of of terms of
` ` $
NOTE : IF WE WANT BID RATE OF PRODUCT IN LHS, THEN TAKE BID

RATE OF PRODUCT IN BOTH QUOTES IN RHS
` ` $
 
AUD $ AUD
1
 60   12
5
1AUD = ` 12 (BR of AUD in terms of `)
 On sales of 1,00,000 AUD,
We will receive 1,00,000  12 = ` 12,00,000
Logic : 1$ = ` 60 – 63,
1$ = AUD 3 – 5
You want to sell AUD
Bank will buy AUD

CA – FINAL
 The relevant rate will be BR of AUD in terms of $

1
1 AUD = $
5
5 AUD = $ ?
 1 $ on sale of 5 AUD
You want to sell $, Bank will therefore buy $
Relevant Rate will be bid rate of $ in terms of `
1 $ = ` 60
 On sale of 1$ you will receive ` 60
5 AUD  1$  ` 60
5 AUD = ` 60
 1 AUD = ` 12 (BR of AUD in terms of `)
Video 18
Cross Currency for Two way quotes – Importer
Example : An Indian Importer buys goods worth

AUD 1,00,000 from an Australian supplier
1 AUD = _______ – ________?
We want to buy AUD.
Bank will sell AUD.
The relevant rate will be Ask Rate (AR) of AUD in terms of `
1$ = ` 60 – 63, 1 AUD = ` _______ – _______ ?
1$ = AUD 3 – 5
Step 1 : Common currency is $
Step 2 : We want 1 AUD = ` __________ – __________

Relevant Rate = Ask Rate of AUD in terms of `

CA – FINAL
` ` $ TAKE AR of PRODUCT 
 
AUD in BOTH QUOTES IN RHS
Step 3 :
AUD $
  
1AUD = ` _______1$ = ` _______1AUD = $ _______
  
AR of AR of AR of
AUD in $ in AUD in
terms of terms terms of
` of ` $
` ` $ `
   AR of Product 
AUD $ AUD
1
 63   21
3
1AUD = ` 21 (AR of AUD in terms of `)
 For purchase of AUD 1,00,000,
We will have to pay 1,00,000  21 = ` 21,00,000
Logic : 1$ = ` 60 – 63,
1$ = AUD 3 – 5
1 AUD = ` ? [AR of AUD in terms of `]
We want to buy $. Bank will sell $.
 The relevant rate will be AR of $ in terms of `
1 $ = ` 63
We have $
We want to buy AUD. Bank will sell AUD.
 Relevant Rate will be AR of AUD in terms of $
1
1 AUD = $
3
3 AUD ? =$1
` 63 _______ 1$ _______ 3AUD
 3 AUD = ` 63
 1 AUD = ` 21 [AR of AUD in terms of `]
 Quote 1 AUD = ` 12 – 21
 
V17 V18

CA – FINAL
Video 19
Q.10. 1 € = $ 1.33 – 1.36
1 £ = $ 1.43 – 1.46
1 £ = € __? _ – __?___
€ € $
   Bid Rate of Product 
£ $ £
1
  1.43
1.36
= 1.0515
 1£ = € 1.0515 (BR of £ in terms of €)
€ € $
   AR of Product 
£ $ £
1
  1.46
1.33
= 1.0977
1 £ = € 1.0977 (AR of £ in terms of €)
 Quote 1 £ = € 1.0515 – 1.0977
Video 20
Q.11. We have `.
We want to buy SGD. Bank will sell SGD
Therefore, the relevant rate will be AR of SGD in terms of `.
1 SGD = ` ? (AR of SGD)
1 $ = ` 65 – 68
1 $ = SGD 12 – 14

CA – FINAL
` ` $
SGD $ SGD
1
 68 
12
= 5.6667
 1 SGD = ` 5.6667
? ` 10,00,000
= 1,76,470 SGD
 With ` 10,00,000 we can purchase SGD 1,76,470
Video 21
Q.12. We want to buy ` . Bank will sell `.

 The relevant rate = AR of ` in terms of £
1` = £ ?__[AR of `]
1$ =` 61.3625 – 61.3700
1 £ = $ 1.5260 – 1.5270
£ £ $
` $ `
1 1
 
1.5260 61.3625
= 0.0107
 1` = £ 0.0107
 To Purchase ` 25 Million,
We need to pay ` 25mn  0.0107
= £ 2,67,500

CA – FINAL
Video 22
Q.13. We want to buy ¥. Therefore bank sell ¥

Therefore the relevant rate will be the AR of ¥ in terms of `
1 ¥ = `____ ? ` / ¥ (AR of ¥)
1 ` = $ 0.020 – 0.025
1 £ = $ 1.4 – 1.48
1 ¥ = £ 0.0049 – 0.0069
` ` $ £
    AR of Product 
¥ $ £ ¥
1
 1.48  0.0069
0.020
= 0.5106
 1¥ = ` 0.5106
 To purchase ¥ 100 lakhs, we need to pay 100 L ¥  0.5106 = ` 51,06,000
Video 23
Q.14. Part 1 : Calculation of Notional ` outflow if Remittance happens on Jan 28

We want to buy SGD.
Bank will therefore sell SGD.
Therefore the Relevant Rate will be AR of SGD in terms of `.
1SGD = `__?__` / SGD (AR of SGD)
1$ = ` 45.85 – 45.90
1£ = $ 1.7840 – 1.7850
1£ = SGD 3.1575 – 3.1590
` ` $ £
    AR of Product 
SGD $ £ SGD
1
 45.90 1.7850 
3.1575
= 25.9482

CA – FINAL
 1SGD = ` 25.9482 (AR of SGD)
Adding 0.125% to the above
Final Quote : 1SGD = ` 25.9806 (Including bank charges or exchange

margin)
Thus for purchase of 25,00,000 SGD we need to pay
= 25,00,000  25.9806
= ` 6,49,51,500 (Notional ` outflow)

Part 2 : Calculation of Actual outflow on Feb 4
1$ = ` 45.91 – 45.97
1£ = $ 1.7765 – 1.7775
1£ = SGD 3.1380 – 3.1390
1SGD = `__?__
` / SGD (AR of SGD)
` ` $ $
  
SGD $ £ SGD
1
 45.97  1.7775 
3.1380
= 26.0394 (AR of SGD)
Adding 0.125% to the above
1SGD = 26.0719 (Including Exchange Margin)
 For purchase of 25,00,000 SGD we need to pay
25,00,000  26.0719
= ` 6,51,79,750 (Actual ` outflow)
Therefore Loss or gain due to delay :-
Jan 28 = ` 6,49,51,500
Feb 4 = ` 6,51,79,750
Loss = ` 2,28,250

CA – FINAL
Video 24
Q.15. Step 1 : Calculation of Sale Value

1,00,000 HKD  ` 5.7
= ` 5,70,000
Step 2 : Calculation of purchase Value

We want to buy HKD
Bank will therefore sell HKD.
The relevant rate will therefore be the AR of the HKD in terms of ` .
1$ = HKD 7.5880 – 7.5920

1$ = ` 42.70 – 42.85
1 HKD = ` __?__ (AR of HKD, in terms of `)
` ` $
 
HKD $ HKD
1
 42.85 
7.5880
= 5.6471
1HKD = ` 5.6471 (AR of HKD)
 The cover Rate:
1HKD = ` 5.6471
Therefore, for purchase of 1,00,000 HKD,
We have to pay
1,00,000  5.6471 = ` 5,64,710
Sale Value = ` 5,70,000
Purchase = ` 5,64,710
Value
Gain = ` 5,290

CA – FINAL
Video 25

$ 10,00,000  1.4400 = € 14,40,000
Step 2: Calculation of purchase Value :

We want to buy $. Bank will sell $.
The relevant rate will therefore be the AR of $ in terms of €
1 $ = € 1.4400 – 1.4450
1$ 1.4450 [AR of $]
 To purchase $ 10,00,000, we will have to pay.
$ 10,00,000  1.4450 = € 14,45,000
 The Loss in this transaction
= € 14,40,000 – € 14,45,000
= € 5000
Calculation of Loss in ` -
We want to buy €. Bank will therefore sell €.
The relevant rate will therefore be AR of € in terms of `.
1 $ = ` 31.4300 – 31.4500
1 $ = € 1.4400 – 1.4450
1 € = ` __?__ [AR of €]
` ` $
 
€ $ €
1
 31.4500 
1.4400
= 21.8403
1€ = ` 21.8403 [AR of €]
 For Purchase of € 5000,
We will have to pay €5000  21.8403
= ` 1,09,201.5

CA – FINAL
Video 26

= 10,00,000  6.5150
= ` 65,15,000
Step 2 : Calculation of Purchase Value :

Option 1:LONDON MARKET
We want to buy DKK.
Bank will therefore sell DKK.
The relevant rate will therefore be the Ask Rate (AR) of DKK in
terms of `.
1£ = ` 74.3000 – 74.3200
1£ = DKK 11.4200 – 11.4350
1DKK = ` __?__ (AR of DK)
(` / DKK)
` ` £
DKK £ DKK
1
 74.32 
11.42
= 6.5079
 1DKK = ` 6.5079 (AR of DKK)
Thus, for Purchase of DKK 10,00,000
We will have to pay DKK 10,00,000  6.5079 = ` 65,07,900
 Gain / Loss on transaction :
65,15,000 – 65,07,900
= ` 7100 Gain

CA – FINAL
Option 2 :NEW YORK MARKET

We want to buy DKK. Bank will therefore sell DKK.
The relevant rate will be AR of DKK in terms of `.
1$ = ` 49.2500 – 49.2625
1$ = DKK 7.5670 – 7.5840
?
1DKK `  AR of Product 
 ` /DKK 
` ` $
DKK $ DKK
1
 49.2625 
7.5670
= 6.5102
 1DKK = ` 6.5102
Therefore for purchase of DKK 10,00,000,
We will have to pay 10,00,000  6.5102 = ` 65,10,200
 Gain / Loss on transaction :-
` 65,15,000 – 65,10,200 = ` 4800 Gain
London  Gain  ` 7100

New York  Gain  ` 4800
 We would want to go for the London market to repurchase
DKK 10,00,000 since the gain is higher.
Video 27
Forward Contracts
A Forward Contract is an agreement entered into between two parties that decide
today to buy / sell a commodity in future at a Fixed Rate decided today itself. It is one
of the most important currency Risk Hedging Tools that we will study in this chapter.
Example : On 1/1 we approach the Bank to tell them that we would be wanting to
buy $10,000 from them after 3 months, i.e. on 1/4
1$ = ` 70 – 75 Spot 
1$ = ` 73 – 79 3m forward Rate 
CA – FINAL
Customer enter into a 3m forward contract with the bank today to buy
$10,000 after 3 months @ 3m FR quoted today – AR of $, in term of `
i.e. 1$ = ` 79
 On due date, ` payable on purchase of $10,000 will be:-
10,000  79 = ` 79,00,000
(IRRESPECTIVE OF SPOT RATE THEN)
Video 28
Q.18. Loan Amount = $ 20,00,000

Interest Rate = 2% + 1% = 3% p.a.
6
Interest Rate from 6m = 3%   1.5%
12
Spot Rate  1$ = ` 50.25 – 50.75
6m Forward Rate  1$ = ` 50.15 – 50.70
(i) Maturity Value of Loan = $20L + 1.5% = $20,30,000
We will therefore enter into a 6m forward contract with the bank (Forex
Dealer) today itself to BUY $ after 6 Months @ 6m FR quoted today.
We want to buy $ (to pay off $ Loan)
Bank (Forex Dealer) will therefore sell $
Therefore, the relevant rate will be AR of $, in terms of ` – 6 months
forward
1$ = ` 50.70 FR (AR of $)
Therefore to purchase $ 20,30,000 after 6m we will need to pay :
20,30,000  50.70 = ` 10,29,21,000
(ii) (a) By the FR, it is evident that $ will depreciate. If we expect
depreciation to be higher than what is present in FR, then we do not
go for FR.
(b) However, in case of uncertainty it is always advisable to go for FR.

CA – FINAL
Video 29
Q.19. ¥ Payable = ¥ 10,00,000

Payable in 6 months time
1$ = ` 45.86 – 45.88 Spot
1$ = ` 46.00 – 46.03 6 months forward
1$ = ¥ 108.00 – 108.00 spot
1$ = ¥ 110.00 – 110.60 6 months forward
Evaluation of option 1 : Notional ` outflow if we take a 6m forward cover for

buying ¥ against `, using cross currency rate.
We want to buy ¥. Relevant Rate will be AR of ¥ (6m FR) in terms of `.

1$ = ` 46.00 – 46.03 6 Months Forward
1$ = ¥ 110.00 – 110.60 6 Months Forward
1 ¥ = ` ? [AR of ¥  6m FR]
(` / ¥)
` ` $
¥ $ ¥
1
 46.03 
110
= 0.4185
1¥ = ` 0.4185 (AR of ¥ in terms of `)
(6m FR)
 To buy ¥ 10,00,000;
We will have to pay,
= 10,00,000  0.4185
= ` 4,18,500

CA – FINAL
Evaluation of option 2: Actual ` outflow based Mr. X‟s Experiment.

Step 1 : Take a 6m Forward cover today to buy ¥ 10,00,000 against $.
Relevant Rate will be AR of ¥ (6m FR) in terms of $
1$ = ¥ 110.00 – 110.60 6 months forward
1
1¥  $
110
 To buy ¥ 10,00,000 we will have to pay
10, 00, 000
 $9091
110
Step 2: Purchase $ 9091 at spot on due date using `.

The Relevant Rate will be AR of $ , in terms of ` = `46.26 (Due date
Spot Rate)
1$ = ` 46.26 = ` 4,20,550
 To Purchase $ 9091, we will have to pay
=$ 9091  46.26
= ` 4,20,550
 Gain / Loss due to Experiment:-
= ` 4,18,500 – 4,20,500
= (` 2050) Loss
Video 30
Q.20. ` 30 L = ¥ 108 L Spot

` 1 = ¥ 3.6 Spot
` 1 = ¥ 3.6 – 10%
` 1 = ¥ 3.24 Expected spot
` 1 = ¥ 3.3 3m Forward Rate

Step 1 : Calculation of Notional ` outflow based on today‟s Spot :
For purchase of ¥ 108L, we would have to pay ` 30 L

CA – FINAL
Step 2 : Calculation of Actual ` outflow based on Expected Spot

(No Hedging) :
`1 = ¥ 3.24
For Purchase of ¥108L, we will have to pay:
108¥ L
 ` 33.33L
3.24
 Loss = 33.33 L – 30 L
= 3.33L
Step 3: Calculation of Actual ` outflow based on forward cover (Hedging)

1` = ¥ 3.30
For purchase of ¥ 108, We will have to pay
108¥L
 ` 32.73L
3.3
 Loss due to taking forward cover
= 32.73 L – 30L
= 2.73L
Loss without Hedging = ` 3.33L
Loss with Hedging = ` 2.73L
Loss hedged by forward cover = 3.33L – 2.73 L
= 0.6L
Video 31
Q.21. Export Exposure ¥ 10,00,000

1$ = ` 62.22 Spot
1$ = ¥ 102.34 Spot
1$ = ` 65 Expected spot
1$ = ¥ 124 Expected spot
1$ = ` 66.5 Aug Forward
1$ = ¥ 110.35 Aug Forward

CA – FINAL
Step 1: Calculation of Notional ` Inflow based on Today‟ spot

1$ = ` 62.22 spot
1$ = ¥ 102.34
1¥ = ` __?__
` ` $
 
¥ $ ¥
1
 62.22 
102.34
= 0.6080
 1¥ = ` 0.6080 SPOT
 On sale of ¥10,00,000;
We would have received = 10,00,000  0.6080
= ` 6,08,000
Step 2 : Calculation of Actual ` Inflow based on Expected spot
1$ = ` 65
1$ = ¥ 124
1¥ = ` __?__
` ` $
 
¥ $ ¥
1
 65 
124
= 0.5242
1¥ = ` 0.5242
 On sale of ¥10,00,000; we will received
= 10,00,000  0.5242
= ` 5,24,200
 Gain / Loss based on Exchange Rate Fluctuations
= ` 5,24,200 – ` 6,08,000
= (`83,800) Loss

CA – FINAL
Step 3: Calculation of Actual ` Inflow based on forward cover

1$ = ` 66.50
1$ = ¥ 110.35
1¥ = __?__
` ` $
 
¥ $ ¥
1
 66.5 
110.35
= 0.6026
 On sale of ¥ 10,00,000, we will receive
=10L  0.6026
= ` 6,02,600
 Loss due to forward cover
= 6,02,600 – 6,08,000
= ( `5,400 )
Loss without Hedging = ` 84,000
Loss with Hedging = ` 5400
Loss hedged by forward contract = `78,600
(ii) Actual spot Rates on 31/Aug
1$ = ` 66.25
1$ = ` 110.85
` ` $
 
¥ $ ¥
1
 66.25 
110.85
= 0.5977
1¥ = 0.5977
 On sale of ¥ 10,00,000, we will received;
= 10L  0.5977
= ` 5,97,700 (Actual spot)

CA – FINAL
Forward Cover = ` 6,02,600

 The forward cover is justified since it gives a higher ` inflow.
Addition ` inflow due to forward cover :
= 6,02,600 – 5,97,700
= ` 4, 900
Video 32
Q.22. (i) Calculation of Expected Spot Rate:

$/£ [x] Probability [p] px
1.6 0.15 0.24
1.7 0.2 0.34
1.8 0.25 0.45
1.9 0.2 0.38
2 0.2 0.4
1 1.81
1£ = $ 1.81 is the Expected Spot Rate on 1/9/03
(ii) If the six-month forward rate is $ 1.80, the expected profits of the firm
can be maximized by retaining its pounds receivable.
Video 33
Q.23. Option 1 : To finance purchase by availing loan @ 18% p.a.:-

Cost of Equipment ` in Lakhs
3,400 Lakh Yen at ` 100 = ¥ 340 1,000.00
Add: 4.5% Interest for Quarter I 45.00
1,045.00
Add: 4.5% Interest for Quarter II 47.02
Total Outflow in Rupees 1,092.03

CA – FINAL
Option 2: To accept the offer from foreign branch :

Cost of Letter of Credit ` in Lakhs
At 1% on 3,400 Lakhs Yen at ` 100 = ¥ 340 10.00
 6
Add: Interest for 2 Quarter 10L 18%  
 12  0.90
(A) 10.90
Payment at the end of 180 days ¥ in Lakhs

Cost 3,400.00
 2 180 
Interest at 2%  3400     Note 1
 100 360  34.00
3,434.00
Conversion at ` 100 = ¥ 345 995.36
 3434.00 
  100   B 
 345 
Total cost A + B 1,006.26
Advice : Option 2 is cheaper by [1,092.03 – 1,006.26]  = `85.77 Lakh

Hence the offer must be accepted.
Note 1 : It is assumed that 1 year = 360 days
Alternatively it can be taken as 365 days (As per ICAI solution).
Video 34
Q.24. Calculation of Net ` Position after 30 days time

(i) Option a :
 USA :- Surplus  $ 12.5 mn
Invest in USA @ 1.5 % p.a. (deposit rate)
30
i.e. 1.5   0.125%
360
 The Maturity Value after 30 days = 12.5 mn + 0.125%

= $ 12.5156 mn

CA – FINAL
30 day Forward cover

` 1 = $ 0.0217
? = $ 12.5156 mn
= ` 576.76 Lakhs
 UK : Surplus  £ 6mn
Invest in UK @ 3.7% p.a. (deposit rate)
30
3.7% 
i.e. 360
= 0.308%
 Maturity Value after = 6mn + 0.308%
30 days = £6.01848 mn
30 day forward cover

` 1 = £ 0.0150
? = £ 6.01848 mn
= ` 401.232 Lakhs
 India :- Deficit  ` 500mn

Borrow in India @ 6.4% p.a (borrowing rate)
30
i.e. 6.4% 
360
= 0.533%
Maturity Value of ` Loan = 500 mn + 0.533
= ` 502.665 Lakhs
 Cash balance at the end of 30 days period if each

company invest / finances its own cash balances / deficits in local
currency independently.
= 576.76 + 401.232 – 502.665
= ` 475.327 Lakhs

CA – FINAL
(ii) Option b:
 India Deficit ` 500 mn
 US  Surplus $ 12.5 mn
` 1= $ 0.0215 (spot Rate)
? = $ 12.5 mn
= ` 581.395 mn
 UK  Surplus £ 6mn
` 1= £ 0.0149
? = £ 6mn
= ` 402.685 mn
 Net ` Inflow Today = 581.395 + 402.685 – 500
= ` 484.08 mn
Invest in India @ 6.2% p.a.
(deposit rate)
i.e. 6.2%  30
360
= 0.5167%
 Maturity Value = 484.08 + 0.5167%
= ` 486.58 Lakhs
Option B is Preferable
Video 35
Q.25. (a) Calculation of ` outflow on 30/9 if forward cover is taken :

` Outflow under FC
($ 50,000  `39) ` 19,50,000
Premium paid today (1/1)
(19,50,000 2%) ` 39,000
Interest on same  3,90, 000 10%  
9
` 2925 ` 41,925
 12 
Rupee outflow on 30/9 if Hedging is taken ` 19,91,925

CA – FINAL
(b) Calculation of ` outflow and gain / loss on 30/9 if no Hedging is done

(i) Spot Rate 1$ = ` 42 (ii) Spot Rate 1$ = `38
= 50,000  42 = 50,000 38
= ` 21,00,000 = `19,00,000
Under FC = ` 19,91,925 Under FC = `19,91,925
Gain = ` 1,08,075 Loss = ( ` 91,925 )
Video 36
Q.26. Evaluation of Option I

Equity Trading Desk in Japan
Amount available for Investment = £200 mn
Today spot Rate  1 £ = ¥ 148.0002
 ¥ available for investment on conversion of £ to ¥ at today‟s
Spot Rate  200 mn  148.0002
 ¥ 29,600.04 mn

Invested in Equity
¥ Receivable in 6m [30/6]
Dividend ¥ 1,182 mn
Stock Borrowing& Lending Activity ¥ 10 mn
Sales of Securities ¥ 29,0008.0392mn
29,600.04 – 2%
Total ¥ Receivable ¥ 30,200.0392 mn
6m FR 1 £ = ¥ 150.0000
 On sale of ¥ 30,200.0392mn
30, 200.0392
Under FC, we will receive
150
= £ 201.3336 mn
 Gain = £ 201.3336 mn
(–) £ 200.0000 mn
£ 1.3336 mn
CA – FINAL
Evaluation of Option II – Fixed Income Desk of USA

Amount available for Investment = £ 200 mn
Today Spot Rate = 1 £ = $ 1.28000
 $ available for investment on conversion of £ to $ today‟s Spot Rate
= 200 mn  1.28000
= $ 256.00 mn

Investment in Bonds
$ Receivable in 6m [30/6]
6 6.4 mn
Interest 256.00 mn  5% 
12
Principal Maturity 256 mn
Total $ Receivable 262.4 mn
6m FR = 1 £ = $ 1.30331
 On sale of $ 262.4 mn under FC, we will receive
262.4
=  £ 201.3335m
1.30331
 Gain = £ 201.3335 mn
(–) £ 200.0000 mn
1.3335 mn
Conclusion : Since There isn‟t much difference in both options, it is preferred to go

for Fixed Income Desk of USA, considering the certainty of Returns.
Video 37
Q.27. Evaluation of Option 1  Pay today

Amount Payable Today = $ 1,00,000
Spot Rate = 1$ = ` 40 – 42
Relevant Rate : AR of $ in term of `
i.e. 1 $ = ` 42
CA – FINAL
 For Buying $ 1,00,000, we will have to pay $ 1,00,000  42 = ` 42,00,000

Interest Rate for 1m
1
= 15%   1.25%
12
 Effective outflow after 1 month
= ` 42,00,000 + 1.25%
= ` 42,52,500
Evaluation of Option II  Pay after 1 month

$ Payable = $ 1,00,000
Including penalty,
$ Payable = $ 1,00,000 + 1%*
= $ 1,01,000
1
 12%   1%
12
1m FR  1 $ = ` 39 – 41
Relevant Rate  AR of $, in term of ` [1m FR]
i.e. 1$ = 41.
 To Buy $ 1,01,000 we have to pay $ 1,01,000  41 = ` 41,41,000
Conclusion : Pay after 1 m, as it is cheaper .
Video 38
Q.28. Evaluation of Option I : Pay the supplier in 60 days

$ Payable = $ 20,00,000
60 d FR  1 $ = ` 57.10
After 60d,
For Buying $ 20,00,000 we have to pay $ 20,00,000  57.10
= ` 11,42,00,000 [after 60 d]
Effective Interest for 30days
30
11, 42, 00, 000  10%  = ` 9,38,630
365
 Outflow after 90days

CA – FINAL
= 11,42,00,000 + 9,38,630
= 11,51,38,630
Evaluation of option II : Pay supplier in 90days

$ Payable = $ 20,00,000
Penal Interest
30
= 20L  8% 
365
= 13,150.68
 $ Payable [Incl. Penal interest]

= 20,00,000 + 13,150.68
= 20,13,150.68
 20,13,151 $
90d FR 1$ = ` 57.50
 Outflow after 90d
= $ 20,13,151  57.5
= ` 11,57,56,183
Conclusion – Go for 60 days offer, as it is cheaper.
Video 39
Q.29. Evaluation of Option I:

Pay the Supplier Today
$ Payable = $ 1,30,000
Spot Rate 1$ = ` 48.35 – 48.36
Relevant Rate : AR of $ in terms of `

i.e. 1 $ = ` 48.36
 To Buy $ 1,30,000 we need to pay $ 1,30,000  48.36 = ` 62,86,800

CA – FINAL
Effective Interest
3
= 62,86,800  15% 
12
= ` 2,35,755
 Total Outflow after 3m

= ` 62,86,800 + ` 2,35,755
= ` 65,22,555
Evaluation of Option II:

Pay the supplier after 3m.
$ Payable = $ 1,30,000
3
Penalty Interest = $ 1,30,000  5% 
12
= $ 1,625
 $ Payable [Incl. Penal Interest]

= $ 1,30,000 + $ 1,625
= $ 1,31,625
3m FR 1$ = ` 48.81 – 48.83
Relevant Rate is AR of $ interest of ` [3m FR]
i.e. 1 $ = ` 48.83
 Outflow after 3m
= $ 1,31,625  48.83
= ` 64,27,248.75
= ` 64,27,249
Conclusion : Pay supplier in 3m, as it is cheaper.

CA – FINAL
Video 40
Q.30. Step 1 : Convert $ to € at today‟s spot

1$ = € 0.4040 – 0.4041
Relevant Rate is BR of $, in terms of €
i.e. 1 $ = € 0.4040
 On Sale of $ 100L, we will Receive

= $ 100 L  0.4040
= € 40.4L
i.e. € 40,40,000
Step 2 : Invest € in Germany for 6m @ 5.95% p.a

6
Interest = € 40,40,000  5.95% 
12
= € 1,20,190
Tax @ 10% on above = € 12,019
 Net interest = € 1,20,190 – € 12,019

= € 1,08,171
 Maturity Value
= 40,40,000 + 1,08,171
= € 41,48,171
Step 3 : Take a 6m FR to Sell € & Receive / Buy $

6m FR
1 $ = € 0.3973 – 0.3976
Relevant Rate is AR of $ in term of € [6m FR]
i.e. 1$ = € 0.3976
 On Sale of € 41,48,171,
41, 48,171
We will Receive =
0.3976
= $ 1,04,33,026
 Gain = $ 1,04,33,026 - $ 1,00,00,000
= $ 4,33,026
CA – FINAL
Video 41
Q.31. (a) Calculation of $ required for purchasing ` 25L after 2 months

2m FR 1$ = ` 47.00 – 47.50
Relevant Rate is AR of ` , in terms of $ [2m FR]
1
i.e. ` 1 = $
47
1
 For Buying ` 25,00,000, we have pay 25,00,000  = $ 53,191.49
47
(b) Calculation of ` required for purchasing $ 2,00,000 spot

Spot Rate : 1 $ = ` 46.00 – 46.25
Relevant Rate : AR of $ in terms of ` [Spot]
 For Buying $ 2,00,000, we have to pay $ 2,00,000  46.25= ` 92,50,000
(c) Evaluation of Option 1 :-

Encash $ today
Relevant Rate : BR of $ in terms of ` [spot]
 On sale of $ 69,000, we will Receive today $ 69,000  46 = ` 31,74,000
Interest for 2 month
2
= 31,74,000  10% 
12
= ` 52,900
Effective inflow after 2m
= ` 31,74,000 + ` 52,900
= ` 32,26,900
(d) Evaluation of Option II :-

Encash after 2 m
Relevant Rate : BR of $ in terms of ` [2m FR]
1$ = ` 47.00
 ` Inflow after 2m = $ 69,000  47
= ` 32.43.000
Conclusion : Option II to be encashed after 2 months, as ` Inflow is Higher.

CA – FINAL
Video 42
Q.32. If foreign exchange risk is hedged

If foreign exchange risk Total (` )
is hedged
Sum due Yen US$1,02,300 Euro
78,00,000 95,920
Unit input price Yen 650 US$10.23 Euro
11.99
Unit sold 12000 10000 8000
Variable cost per unit `225/- 395 510
Variable cost `27,00,000 `39,50,000 `40,80,000 `1,07,30,000
Three months forward 2.427 0.0216 0.0178
rate for selling
Rupee value of receipts `32,13,844 `47,36,111 `53,88,764 `1,33,38,719
Contribution `5,13,844 `7,86,111 `13,08,764 `26,08,719
Average contribution to 19.56%
sale ratio
If risk is not hedged
Rupee value of receipt `31,72,021 `47,44,898 `53,58,659 `1,32,75,578
Total contribution `25,45,578
Average contribution to 19.17%
sale ratio
AKC Ltd. Is advised to hedge its foreign currency exchange risk.
Video 43
Q.33. (a) If supplier is paid within 10 days ` Outflow = [1,00,000 – 2%]  55*
= ` 53,90,000
*Spot Rate 1$ = ` 55
(b) If supplier is paid in 90 days.
` Outflow = 1,00,000  56*
= 56,00,000
 90d FR 1$ = ` 56

CA – FINAL
(c) Material Variance
Usage Variance Price Variance

[SQ – AQ]  SR [SR – AR]  AQ
[1L – 98k] 56 [56 – 55] 98k
= 1,12,000 F =98,000 F
Due to Time value of Protection from

money / Discount for Currency Fluctuation
pre-payment
Video 44
Appreciation and Depreciation of currency
Appreciation is the strengthening of a currency.

Depreciation is the weakening of a currency.
Example :
Spot 1$ = ` 70 $ is appreciating in the Forward
3m Fr 1$ = ` 77 Market, compared to `
% Appreciation / Depreciation of a PRODUCT =
77 -70 12
= × ×100
70 3
= 40%
Where F = Forward Rate

S = Spot Rate
m = No. of months forward contract

CA – FINAL
S – F 12
% Appreciation / Depreciation in PRICE =   100
F m
70 -77 12
× ×100
77 3
= (36.36%)
Video 45
Q.34. Spot : 1 AUD = ` 29.45

3m FR : 1 AUD = ` 29.36
(a) AUD is Depreciating
` is Appreciating
(b) % Appreciation / Depreciation for Product :- (AUD)

Forward Rate – Spot Rate 12
   100
Spot Rate 3
F – S 12
   100
S 3
29.36 – 29.45 12
   100
29.45 3
= (1.2224%) p.a.
% Appreciation / Depreciation for Price :- ( ` )

S – F 12
   100
F 3
29.45 – 29.36 12
   100
29.36 3
= 1.2262% p.a.

CA – FINAL
Video 46
Q.35. 1FF = $ 0.2 Spot

1Ff = $ 0.2 + 10%
 1FF = $ 0.22
? = $1
= 4.55 FF
 1$ = 4.55 FF
Video 47
Q.36. (a) Spot 1$ = ` 45.60

60 days FR 1$ = ` 45.20
F – S 365
% Depreciation/ Discount in $ (PRODUCT) =   100
S days
45.2 – 45.6 365
   100
45.6 60
= (5.34%) p.a.
(b) Operating Loss, if forward sale is agreed upom
= [45.2 – 45.5]  $ 1,00,000
= ` 30,000
Video 48
Q.37. Spot Rate 1$ = FF 5.7

 $ 1,24,000 is equivalent to :-
= 1,24,000  5.7
= FF 7,06,800

CA – FINAL
Case I : If FF  5%
 Expected Spot after 90 days
1
Spot 1FF = $
5.7
1
 Exp. Spot 1FF = $ + 5%
5.7
i.e. 1FF = $ 0.1842
1, 24, 000
 FF Receivable =
0.1842
= FF 6,73,181
 Loss = 7,06,800 – 6,73,181
= FF 33,619
Case II : If FF  5%
 Expected spot:
1
1FF = $ – 5%
5.7
i.e. 1FF = $ 0.1667

1, 24, 000
 FF Receivable =
0.1667
= FF 7,43,851
 Gain = 7,43,851 - 7,06,800
= FF 37,051
Video 49
Q.38. B0 = $ 5,000
B1 = $ 5,250
I1= $ 350
B1  B0  I1
Return (%) =  100
B0
Let 1$ = ` 100 be spot
 Spot after 1 year = ` 100 + 2%
1$ = ` 102
CA – FINAL
Calculation of Return (%) (in ` )

Investment today = $ 5,000  100
= ` 5,00,000
After 1 year, $ Inflow = $ 5,250 + $ 350

= $ 5,600
 ` Inflow after 1 year = $ 5,600  102

= ` 5,71,200
5, 71, 200  5, 00, 000

 Return (%) =  100
5, 00, 000
= 14.24%
Video 50
Swap Points
Swap Points refer to the difference between Spot Rate and Forward Rate.
Example :
1$ = ` 70 - 72 Spot
1$ = ` 73 - 78 3m FR
Bid Ask Spread
Spot 70 72 2
3m FR 73 78 5
Swap points 3 6
 
Bid Swap Ask Swap
Swap Points = Forward Rate – Spot Rate
From Exam Point of View

Rule 1 : If Swap points are in ASCENDING ORDER i.e. Ask swap > Bid Swap;
THEN ADD swap points to spot to find 3m FR.
CA – FINAL
Exception : If word „DISCOUNT‟ is used, then subtract.
Rule 2 : If Swap point are in DESCENDING ORDER i.e. Ask swap < Bid swap;
THEN DEDUCT swap points from spot to find 3m FR
Exception : If word „ PREMIUM is used, then Add.
Rule 3: Always and always Add / Subtract to / from the LAST DIGITS
Example : 1$ = ` 70.3515 – 72.4173
3m spot = 25 – 35
 FR = ` 70.3540 – 72.4208
Video 51
Q.39. (a) Spot 1$ = ` 44.5450 – 44.5475

SwapPoint (Nov) 1$ = 7900 – 8400
Forward Rate 1$ = ` 45.3350 – 45.3875
(b) Spot 1$ = ` 44.4475 – 44.9500

Swap Point (Nov) 1$ = 7900 – 7400
Forward Rate 1$ = ` 43.6575 – 44.2100
Video 52
Q.40. We are searching for 1 SGD = ` ?

` ` $
= ×  AR of Product  (2 m FR)
SGD $ SGD
1
 49.56   Note1
1.7154
= 28.8912
1SGD = ` 28.8912  2m FR (Oct FR), Ask Rate of SGD in terms of `.
`
Note 1: For
$

CA – FINAL
1$ = ` 49.3800 + 0.1300 (2m FR)

1$ = ` 49.5100
Margin  ` 0.01 Per `10

 For ` 49.5100, margin = 0.05
 1$ = ` 49.5100 + 0.05
1$ = ` 49.56 [2m FR]
$
For ,
SGD
1$ = SGD 1.7058 – 1.7068

2m swap Point = 0.0096 – 0.0097
2m FR = SGD 1.7154 – 1.7165
1
1SGD = $ (2m FR)
1.7154
Video 53
Q.41. (a) Spot Rates:
Bank A Bank B
1 USD = CHF 1.4650 –1.4655 1USD = CHF 1.4653 – 1.4660
1 GBP = USD 1.7645 – 1.7660 1GBD = USD 1.7640 – 1.7650

1 GBP = CHF ? (AR of GBP in terms of CHF)

CA – FINAL
Cross Rate  Option I  Both quotes from Bank A.

CHF GHF USD
= × (Ask Rate of Product)
GBP USD GBP
= 1.4655  1.7660
= 2.5881
 1 GBP = CHF 2.5881
Cross Rate  Option II Both quotes from Bank B (AR of GBP, in

terms of CHF)
CHF GHF USD
= × (AR of Product)
GBP USD GBP
= 1.4660  1.7650
= 2.5875
 1GBP = CHF 2.5875
Cross Rate  Option III  Quote 1 from Bank A and Quote 2 from
Bank B
CHF GHF USD
GBP USD GBP
= 1.4655  1.7650
= 2.5866
 1GBP = CHF 2.5866
Cross Rate  Option IV  Quote 2 from Bank A and

Quote 1 from Bank B
CHF GHF USD
GBP USD GBP
= 1.4660  1.7660
= 2.5890
 1GBP = CHF 2.5890
 Option III is the cheapest option

 1GBP = CHF 2.5866
1mn GBP = 2.5866 mn

CA – FINAL
(b) 1 GBP = CHF 2.5850 – 2.5881 Spot

1 GBP = CHF 2.5822 – 2.5869 3m
FR
3m Swap points = –0.0028 –0.0012
Working :-
 Bid Rate of spot :-
CHF CHF USD
= × (BR Rate of Product)
GBP USD GBP
= 1.4650  1.7645
= 2.5850
To find 3 month forward Rate :

(i) 1USD = CHF 1.4650 – 1.4655 Spot
1USD = 5 – 10 3m Swap point
1 USD = CHF 1.4655 – 1.4665 3m FR
(ii) 1 GBP = USD 1.7645 – 1.7660 Spot

1 GBP = 25 – 20 3m Swap Point
1 GBP = USD 1.7620 – 1.7640 3m FR
 Bid Rate of 3m Forward :-

CHF GHF USD
= × (BR of Product)
GBP USD GBP
= 1.4655  1.7620
= 2.5822
1GBP = CHF 2.5822

CA – FINAL
 Ask Rate of 3m Forward :-

CHF GHF USD
= × ( AR of Product)
GBP USD GBP
= 1.4665  1.7640
= 2.5869
1GBP = CHF 2.5869
 3m Swap points = 28/12
Video 54
Q.42. Calculation of ` Outflow in 3m :

Option I : Pay supplier in 3m
$ Cost Today = 5000  20
= $ 1,00,000
Including Interest $ payable to supplier in 3m

 3
 $1, 00, 000  $1, 00, 000  10%  
 12 
= $ 1,02,500
3m FR : 1$ = ` 60.55 – 0.25 [AR of $]

= 60.30
 ` Payable in 3m = $ 1,02,500  60.30
= ` 61,80,750
Option II : Pay supplier Today
$ Payable Today = $ 1,00,000
Spot 1$ = ` 60.55 = [AR of $]
 ` Required Today = 1,00,000  60.55
= ` 60,55,000 [overdraft taken]

CA – FINAL
3
Interest on OD = 60,55,000  14% 
12
= 2,11,925
 Total ` Outflow in 3m
= 60,55,000 + 2,11,925
= 62,66,925
 We will choose option I as it is cheaper.
Video 55
Q.43. Step 1: Calculation of ` inflow after 2 months :

$ Receivable = $ 4,50,000
FR 1$ = ` 48.90
` Inflow = 4,50,000  48.90
= `2,20,05,000
Step 2: Calculation of Maturity value at the end of 3 months

Interest Rate = 12% p.a.
1
Maturity Value= 2,20,05,000 + 2,20,05,000  12% 
 12 
= ` 2,22,25,050
Step 3: Calculation of 3m forward Rate:
Spot Rate : 1$ = ` 48.70
3m swap Point : 45 points
 3m FR = 48.70 + 0.45
1$ = ` 49.15
Step 4: Calculation of ` payable after 3m

$ Payable = $ 7,00,000
3m FR = 1$ = ` 49.15
` Payable = ` 3,44,05,000

CA – FINAL
Step 5: Calculation of gain / Loss in 3m time

(`)
` Receivable 2,22,25,050
` Payable (3,44,05,000)
Loss (`) ` 1,21,79,950
Video 56
Q.44. Evaluation of Investment Option :

Option 1 : Investment in London
$ Available for investment = $ 5,00,000
Spot 1 £ = $ 1.5350 – 1.5390
Relevant Rate  BR of $ in terms of £
1
1$ = £
1.5390
On Sale of $ 5,00,000,
1
We will receive 5, 00, 000  = £ 3,24,886
1.5390
3
Interest = £ 3,24,886  5%  = £ 4,061
12
 £ Receivable in 3 m = £ 3,28,947
On the other hand,
Interest accrued on $ 5,00,000
3
= $ 5,00,000  4% 
12
= $ 5,000
 Total $ accrued in 3m
= $ 5,00,000 + $ 5,000
= $ 5,05,000
Calculation of £ accrued to purchase $ 5,05,000 in 3m :-
Relevant Rate  AR of $ in terms of £ [3m FR]
Spot Rate 1 £ = $ 1.5350 – 1.5390

3m swap point = 80 – 85
 3m FR 1£ = $ 1.5430 – 1.5475
CA – FINAL
1
 1$ = £ [AR of $ – 3m FR]
1.5430
1
 £ Accrued = 5, 05, 000 
1.5430
= £ 3,27,285
 Gain = £ 3,28,947 - £ 3,27,285
= £ 1,662
Option 2: Investment in New York
Amount available for investment = $ 5,00,000
3
Interest Earned = $ 5,00,000  8% 
12
= $ 10,000
 Total $ Receivable = $ 5,10,000
Total $ Accrued = $ 5,05,000
Gain ($) (in 3m) = $ 5,000
Calculation of Gain (in £) :–
3m FR 1 £ = $ 1.5430 – 1.5475
Relevant Rate  BR of in terms of £ [3m FR]
1
i.e. 1 $ = £
5, 475
 On Sale of $ 5,000
We will Receive 5,000  1
= £ 3,231
5, 475
Option 3: Investment in Frankfurt

Amount available for investment = $ 5,00,000
Investment to be done in €
Spot Rates = 1 £ = $ 1.5350 – 1.5390
= 1 £ = € 1.8260 – 1.8290
1 € = $ ? [AR of €]
$ $ £
  [AR of Product]
€ £ €
1
= 1.5390  = 0.8428
1.8260
 1€ = $ 0.8428

CA – FINAL
 On Sale of $ 5,00,000,
5, 00, 000
We will Receive = € 5,93,261
0.8428

Invested 3% p.a. for 3m
i.e. 0.75%
 Maturity Value = € 5,93,261 + 0.75%
= € 5,97,710
3m FR :
1£ = € 1.8260 - 1.8290
(-) 0.0145 0.0140
1£ = € 1.8115 - 1.8150
To convert € to £ using 3m FR,
Relevant Rate will be BR of €, in terms of £
1
i.e. 1€ = £
1.8150
 On Sale of € 5,97,710
1
We will Receive 5,97,710  = £ 3,29,316
1.8150
(-) £ Accrued £ 3,27,285
Gain (in £) £ 2,031
Conclusion – Invest in New York, as Gain (in £) is Highest.
Video 57
Q.45 (i) Swap Points for 2 months and 15 days

Bid Ask
Swap Points for 2 months (a) 70 90
Swap Points for 3 months (b) 160 186
Swap Points for 30 days (c) = (b) – (a) 90 96
Swap Points for 15 days (d) = (c)/2 45 48
Swap Points for 2 months & 15 days (e) = (a) + (d) 115 138

CA – FINAL
(ii) Foreign Exchange Rates for 20th June 2016

Bid Ask
Spot Rate (a) 66.2525 67.5945
Swap Points for 2 months & 15 days (b) 0.0115 0.0138
66.2640 67.6083
(iii) Annual Rate of Premium

Bid Ask
Spot Rate (a) 66.2525 67.5945
Foreign Exchange Rates for 66.2640 67.6083
th
20 June 2016 (b)
Premium (c) 0.0115 0.0138
Total (d) = (a) + (b) 132.5165 135.202
8
Average (d) / 2 66.2583 67.6014
Premium 0.0115 12
× ×100
0.0138 12
× ×100
66.2583 2.5 67.6014 2.5
= 0.0833% = 0.0980%
Video 58
Exchange Margins
Exchange Margins can be seen as Bank Charges.
For the Customer,

Net Bid Rate = Base Bid Rate – Exchange Margin
Total Ask Rate = Base Ask Rate + Exchange Margin
Base Bid Rate / Base Ask Rate  Inter-Bank Rates

Net Bid Rate / Net Ask Rate  Merchant Rates

CA – FINAL
Video 59
Q.46. 1£ = ` 66.3250 – 66.4525

Calculation of Merchant Rates :
Bid Rate
1£ = ` 66.3250 – 0.130%
= ` 66.2388
Ask Rate
1£ = ` 66.4525 + 0.030%
= ` 66.4724
1£ = ` 66.2388 – 66.4724
Video 60
Special case in forward contracts – Introduction
Cancellation Extension Honor (1) Importer‟s Point of

Before    view
DD (2) Exporter‟s Point of
On DD    view
After DD   
Video 61
Base Example
1/1 1$ = ` 40 Spot
1$ = ` 50 3m FR
1/3 1$ = ` 51 Spot
1$ = ` 53 1m FR
1$ = ` 55 2m FR
1/4 1$ = ` 52 Spot
1$ = ` 56 1m FR
1$ = ` 51.5 15 days FR
15/4 1$ = 51.75 Spot
CA – FINAL
On 1/1 customer enters into a 3m forward contract with Bank A to

Contract A
buy $ 3m forward @ ` 50 per $
On 1/1 Bank A enters into another 3m forward contract with Bank

Contract B
B to buy $ 3m forward @ ` 50 per $
Video 62
Base Example – Cancellation on Due Date

[From customer’s point of view]
(Focus on Contract A only]
On 1/4, customer approaches Bank A and asks for CANCELLATION of Contract A.

He can do so by taking an opposite stand.
Original position : BUY $ `50 [Original Contract Rate]
To Cancel: SELL $ @ `52 [1/4 Spot]
Net gain to customer `2  Paid by Bank A to customer on 1/4
Note: This explanation / example is from IMPORTER‟S point of view.

Had it been from EXPORTER‟S point of view, then
Original Position : Sell $ ` 50
To Cancel : Buy $ ` 52
Net Loss to customer : `2
Video 63
Q.47. Original position : Buy $ @ ` 65.3450

To Cancel : Sell $ ` 65.2247
(Spot on Due date  Bid Rate of $)

CA – FINAL
Net Bid Rate:

1$ = ` 65.2900 – 0.10%
1$ = ` 65.2247
 Loss on cancellation = [(65.2247 – 65.3450) 2,50,000

= 30,075
Adding Flat charges to the loss = 30,075 + 100

Total Loss = ` 30,0175
Note:
ICAI has rounded off cancellation rate
DO NOT APPLY EXCHANGE MARGIN CONTRACT RATE
Video 64
Q.48. Original Position : SELL $ @ ` 64.4570

To Cancel : BUY $ @ ` 64.5907
(Spot on due date  Ask Rate of $)
1$ = ` 64.3975
Net Ask Rate:
1$ = ` 64.3975 + 0.30%
1$ = ` 64.5907
 Loss on cancellation = [(64.4570 – 64.5907) 2,00,000]
= 26,740
Adding flat cancellation charges to the loss = 26740 + 200

Total loss = ` 26,940

CA – FINAL
Video 67
Cancellation before due date

(From Customer’s point of View)
(Focus on Contract A only)
Contract A : [1/1] : Customer enters into a 3m forward contract with Bank A to

buy $ 3m forward @ ` 50 (1/4)
[1/3] : Customer approaches Bank A to cancel Contract A.

He can do so by taking an opposite stand.
Original position : BUY $ [Original Contract Rate]
` 50
@
To Cancel: SELL $ [1/3→1m FR]
` 53
@
Gain to customer which Bank ` 2 Per $
will pay to customer on 1/4
Video 68
Q.49. Original Position : SELL AUD @ ` 47.2500 (Original Contract Rate)

To Cancel : BUY AUD @ ` 47.5200 (1m FR  2m)
 Loss on cancellation of FC
= ` (47.2500 – 47.5200) 1,00,000
= ` 27,000

CA – FINAL
Video 69
Q.50. Original Position : SELL CHF @ ` 36.25 (Original Contract Rate)

To Cancel : BUY CHF @ ` 36.52 (1m FR  after 2m)
 Loss on cancellation of FC
= ` (36.25 – 36.52) 1,00,000
= ` 27,000
Video 70
Q.51. Contract A : Customer enter into a 3m forward contract with Bank to sell
CHF @ ` 32.4000 having due date on 25/4
Cancellation Date  25/3
Original Position : SELL CHF @ ` 32.4000
To Cancel : BUY CHF @ 1m FR  AR of CHF, in terms of `
1m FR 1$ = CHF 1.5150 – 1.5160
1$ = ` 49.4302 – 49.4455
+ 00.4100 00.4200
1$ = ` ` 49.8402 – 49.8655
` ` $
= × (AR of Product) (1m FR)
CHF $ CHF
Note: 49.9154 = 49.8655+ 0.10%
1
 49.9154 
1.5150
= 32.9475
1 CHF = ` 32.94725 (AR of LHF, in terms of `)
 Loss on cancellation = (32.40000 – 32.9475) 1,00,000
= ` 54,750

CA – FINAL
Video 73
Extension on Due Date
[Customer’s point of view]
[Contract A]
Contract A : On 1/1, customer enters into a 3m forward contract with Bank A to Buy
$ 3m forward @ ` 50 (Due Date 1/4)
On 1/4 : Customer approaches Bank A and says

“I want to extend Contract A by 1 month”
i.e. till 1/5
To Extend:-
Step 1: Cancel Original Contract A on Due Date
Step 2: Book a new Contract A on Due Date to buy $ 1 FR @ 1m FR quote on 1/4
 1$ = ` 56
[1/4– 1m FR]
Video 74
Q.52 Step 1 : Cancel Original Contract on Due Date

Original position : SELL $ @ ` 62.5200
To Cancel on due date : Buy $ @ ` 62.7827
(Spot Rate on Due Date, AR of $ in Terms of ` )
1$ = 62.7200
+ 0.1%
62.7827
 Loss on cancellation = (62.5200 – 62.7827) 1,00,000
= ` 26,270

CA – FINAL
Step 2: Book a new forward cover on Due Date @

1m FR  BR of $
1$ = ` 62.6400
– 0.1%
62.5774
Video 75
Q.53. Step 1 : Cancel Original contract on Due Date

Original position : Buy $ @ `41.87 (Original Contract Rate)
To Cancel: Sell $ @ `40.4476 (Spot Rate – Bid Rate)
Net Bid Rate:

1$ = ` 40.4800
– 0.08%
` 40.4476
 Loss on cancellation = (40.4476 – 41.87) 10,000
= ` 14,224
Step 2: Book a new forward cover on Due Date @

3m FR  AR of $
1$ = ` 40.4900
Adding swap + 0.3750
Point
` 40.8650
+ 0.25%
40.9672

CA – FINAL
Video 76
Q.54. Original Contract

 Customer enter into a 2m FC to buy $ 2m forward @ 2m FR quoted on
1/1/17
1$ = ` 45 [1/3/17]
Evaluation of Option I :
 Pay supplier Today [1/3/17] Due Date
Rupee outflow Today = $ 1,00,000 ` 45
= ` 45,00,000
 1
Rupee outflow after 1m = 45L +  45L  18%  
 12 
= ` 45,67,500
Evaluation of Option II :-
Pay supplier after 1m
$ payable after 1m = $ 1,00,000 + 0.5%
= $ 1,00,500
Step I : Cancellation of FC on DD :
Original Position : Buy $ ` 45
To Cancel : Sell $ ` 46
[DD  Spot  BR of $]
 Gain on cancellation of FC on Due Date:
= ` (46 – 45)  $ 1,00,000
= ` 1,00,000
MV after 1m
 1
= 1,00,000 + 1,00,000  18%  
 12 
= ` 1,01,500

CA – FINAL
Step II : Book a new forward contract :

Contract Rate  1M FR  Due Date  AR of $
1$ = ` 47.2
$ 1,00,500  47.2
= ` 47,43,600
But
Net Rupee Outflow = ` 47,43,600 – ` 1,01,500
= ` 46,42,100
Comparing Option I & II; Option I is preferable as it is cheaper.
Video 77
Q.55. We want to buy $. Thus bank will sell $.

(i) Step 1 : Cancel Original Contract :
Original position : Buy $ @ `42.32
To Cancel : Sell $ @ `41.4689
(Spot on Due Date – Bid Rate of $ in terms of `)
1$ = ` 41.5000
Ex. Margin – 0.075%
Bid Rate ` 41.4689
 Loss on cancellation = ` (41.4689 – 42.32) 20,000
= ` 17,022
(ii) Step 2: Book a new forward contract

Contract Rate will be 3m FR on Due Date, AR of $ in terms of `
1$ = 41.52000
+
3m Premium 0.93%
41.9061
+
Ex. Margin 0.20%
New Rate ` 41.9899

CA – FINAL
Video 78
Q.56. We want to sell $. Bank will thus buy $.

(i) Step 1: Cancel Original Contract :
Original position : Sell $ @ `62.32
To Cancel : Buy $ @ `61.6430
(Spot on Due Date)
(Ask Rate of $ in terms of ` )
1$ = ` 61.5200
+ 0.20%
Ask Rate ` 61.6430
 Loss on cancellation = ` (61.6430 – 62.32) 20,000
= ` 13,540
(ii) Step 2: Book a new forward contract

Contract Rate will be 3m Forward Rate, BR of $ in terms of `
1$ = 61.5000
–
3m Discount 0.93%
60.9281
–
Ex. Margin 0.45%
Bid Rate ` 60.6539
Video 81
Extension before due date :

(Customer’s point of view)
(Contract A)
Contract A : Customer enters into a 3m forward contract with Bank A to buy $

` 50 3m forward (Due date 1/4)
Now, he wants to extend contract on 1/3
 Step 1 : Cancel original contract on 1/3(Before due date)
Step 2 : Book a New contracts A on 1/3  2m FR @ 1$ = `55
CA – FINAL
Video 82
Q.57. Step 1 : Cancellation of Original contract 5/5

Original position : sell $ @ `59.6000
To Cancel : Buy $ @ `59.3017
(1m FR  AR of $ in terms of `)
1$ = ` 59.2425
+ + 0.10%
1$ ` 59.3017
 Gain on cancellation = ` (59.6 - 59.3017)  50,000
= ` 14,915
Step 2: Book a new forward contract 2m FR on 5/5 for 5/7

New 2m FR = BR of $,
1$ = ` 59.6300
– 0.10%
New contract Rate ` 59.5704
Note: ICAI has rounded off the rates.
Video 83
Q.58. Step 1 : Cancellation of Original contract 5/9

Original position : Buy $ @ `58.52
To Cancel : Sell $ @ `58.2133
(1m FR on 5/9 – Bid Rate of $ in terms of ` )
1$ = ` 59.3300
– + 0.20%
1$ ` 58.2133
 Loss on cancellation = ` (58.2133 - 58.52) $ 70,000

= ` 21,469

CA – FINAL
Step 2: Book a new forward contract 2m forward rate on 5/9 for 5/11
New 2m FR = AR of $,
1$ = ` 58.7425
+ 0.20%
Video 86
Honor or Execution on due date

(Customer’s point of view)
(Contract A)
Contract A : Customer enters into a 3m forward contract with Bank A to buy $

` 50 3m forward on 1/1. On 1/4 customer honors the contract by
paying ` 50 and receiving $1 from bank.
Video 87
Q.59. Amount to be debited in the customer‟s A/c
= $ 1,00,000  65.6
= ` 65,50,000
Video 90
Honor / Execution before due date

[Customer’s and Bank A’s]
[Contract A & B]
Contract A (1/1) : Customer enters into a 3m FC with Bank A to BUY $ 3m FC 1 $ ` 50

[3m FR – 1/1]
Due Date = [1/4]

CA – FINAL
Contract B : Bank A enters into a 3m FC with Bank B to BUY $ 3m FC 1$ @ ` 50

[3m FR – 1/1]
Due Date = [1/4]
On 1/3, customer approaches Bank A and says – “I want to honor contract A
TODAY.”
This is a case of Early Honor :-
(1) OCR will be maintained
Original Contracted Rate
Customer BUYS 1$ @ ` 50 on 1/3
(2) Swap Gain / Swap Loss
„Swap‟  2 simultaneous and opposite transactions that Bank A enters into
with Bank B due to customer turning up early for Honor / Execution of
Contract A.
Swap Transition # 1  Emergency spot Transaction to Early Honor Contract
A (1/3)
Bank A approaches Bank B on 1/3 to purchase
1$ spot @ 1$ = ` 51 [1/3 – spot]
BUY $ @ ` 51
Swap Transaction # 2  Cancellation of contract B (1/3)
Original Position : BUY $ ` 50
To Cancel : SELL $ @ ` 53 [1/3 – 1m FR]
Swap Gain = 53 – 51
=`2
Bank A will transfer to customer ` 2 on 1/4
(3) Interest on Inflow / Outflow of funds
Simply calculate gain/loss, if any to Bank A when it does Emergency Spot
Transaction & honors Contract A.
1/3 : BUY @ ` 51 (Emergency Purchase)
SELL @ ` 50 (Honor contract A)
Outflow of Fundo = ` 1 i.e. (51 – 50)
 Bank will charge interest on ` 1 for a period of 1m
[1 month  [1/3 – 1/4]
 
Early Honor Date Original Due Date

CA – FINAL
Video 91
Q.60. Execution before due date

(1) OCR will be maintained :
Customer sells $ 1,00,000 @ ` 65.40
On 30/11,
` Inflow = 1,00,000  65.4
= ` 65,40,000
(2) Swap Gain / Swap Loss :
ST # 1  Emergency Sale (30 / 11)
Sell $ @ ` 65.22 (30/11 Spot)
Swap Transaction # 2  Cancellation of Original Contract B (30/11)
 Original Position : SELL $ ` 65.40
To Cancel : BUY $ @ ` 65.42
[30/11  1m FR  AR of $]
Swap Gain = (65.22 – 65.42)  $1,00,000
= ` 20,000
(3) Interest on Inflow / Outflow of funds :
Gain / Loss during Emergency Transaction on 30/11
Buy $ @ 65.4 [Contract A]
Sell $ ` 65.22 [Emergency Sale]
Loss / Outflow of funds = ` 0.18
 1,00,000
` 18,000
 Interest charged by Bank :
1
= 18, 000 18%   ` 270
12
(1) OCR  ` 65,40,000
(2) SL  ` 20,000
(3) Interest  ` 270
` 65,60,270
31
Note : ICAI has used for Interest.
365

CA – FINAL
Video 92
Q.61. Execution before due date :

(1) OCR will be maintained :
Customer buys $ 7,000 @ ` 46.67 on 19/2
` Outflow = $7000  46.67
= ` 3,26,690
(2) Swap Gain / Swap Loss :
ST # 1  Emergency Purchase on (19/2) @ ` 46.5725
Buy $ 7000 @ ` 46.5800 (19/2 Spot)
ST # 2  Cancellation of Original Contract B

 Original Position : BUY $ `7000 @ ` 46.6550
To Cancel : SELL $ @ 7000 @ ` 46.3550
(1m FR on cancellation Date = 19/12)
(Bid Rate of $)
 Swap Loss = (46.3550 – 46.5800) 7000
= ` 1,575
(3) Interest on Inflow / Outflow of Funds :
Gain / Loss during Emergency Transaction on 19/2
Buy $ @ ` 46.5800 [Emergency Purchase]
Sell $ @ ` 46.67000 [Contract A]
Gain / Inflow of funds = ` 0.09
 7000
` 630
1
 Interest charged by Bank = 630 12%   6.3
12
(1) OCR  ` 3,26,690
(2) SL  ` 1,575
(3) Interest  (` 6.30)
(4) Flat charges for Early delivery  ` 100
` 3,28,358.70

CA – FINAL
Video 96
Rules of Automatic Cancellation (RAC)
“LATE”
Customer does not turn Customer comes after Due Date

up at all but within 15 days
(I) (II)
(I) Customer does not Turn up at all :

 On 15th Day RAC will apply
1. Exchange Rate Difference (15/4)

[Deemed Loss on cancellation of contract A]
(Gain is Ignored)
Original Position : SELL $ ` 50 (OCR)
To Cancel : BUY $ ` 51.75 (15/4) spot)
 Loss on cancellation = ` 1.75 per $
Bank will recover this from customer on 15/4
2. Swap Loss :
ST # 1 : To Cancel Contract B
Original Position : SELL $ ` 50 (OCR)
1/4 To cancel : BUY $ @ `52 (1/4 spot)
ST #2 : Book on Earliest Available forward contract
SELL : $ @ ` 51.5 (15d FR  1/4)
Swap Loss (SL)  ` 0.5 per $ Customer has to pay to Bank A on 15 /4
3. Interest on outflow of funds :

Simply calculate gain / Loss to Bank A on cancellation of original contract B
Loss on cancellation ` 2
 Bank will charge Interest on ` 2 from customer for 15 days (1/4 to 15/4)

CA – FINAL
Note on RAC Applicability:
After Due Date
If Cancel If Extend If Honor

RAC  RAC  RAC 
Video 97
Q.62 RAC
(1) Exchange Rate Difference
Opening Position : BUY $ @ ` 66.8400
To Cancel : SELL $ @ ` 65.8940
[20/9 spot  BR of $]
1$ = ` 65.9600
–
(0.1%)
 Loss on cancellation = [65.8940 – 66.8400] 50,000
= ` 47,300
(2) Swap Loss :
ST # 1 : 10/9 cancel original contract B
Original Position : BUY $ @ ` 66.6800
To Cancel : SELL $ @ `66.1500
[10/9 SPOT  BR OF $]
ST #2 : Book on New FC (Contract B) with Bank B to BUY $ at Earliest FR
available
BUY : $ @ `66.3200
Swap Loss (SL) = (66.1500 – 66.3200)50000
= ` 8,500
(3) Calculation of Interest on outflow :
= (66.1500 – 66.6800)  50,000
10
= 26,500  12%  = ` 87
365

CA – FINAL
RAC
(1) Exchange Difference ` 47,300
(2) Swap Loss ` 8500
(3) Interest ` 87
` 55,887
(i) To cancel the contract :
RAC = ` 55,887
(ii) To Execute the contract :

RAC = ` 55,887
Also BUY $ 50,000 @ ` 65.9900 + 0.1% = 66.0560
(20/9  Spot  AR  Post Exchange Margin)
(iii) To Extend the contract to 20/9

RAC = ` 55,887
Also, on 20/9 Extension  November
1$ = ` 66.4900 + 0.1%
= ` 66.5565
[20/9  NOV FR  AR  Post Exchange Margin]
Video 98
Q.63.
(i) Cancellation Rate
The contract a shall be cancelled on 20/6 spot Rate.
Opening Position : BUY $ @ ` 64.4000
To cancel : SELL $ @ ` 63.6163
[Bid Rate of $ - Spot 20/6]
Bid Rate = 63.6800
– Ex. Margin 0.10%
Net Bid Rate 63.6163
 Cancellation Rate = ` 63.6163  ` 63.6175

CA – FINAL
(ii) Amount Payable on $ 2,00,000 :

To cancel : SELL $ @ 63.6175
 Loss on cancellation = (63.6175 – 64.40)  2,00,000

= ` 1,56,500
(iii) Swap Loss :
ST # 1 : Cancel Original Contract B
To cancel : SELL $ @ 63.80
(10/6 – Spot – Bid Rate)
ST # 2 : Book a new forward contract on 10/6 – 1m forward

(Note : Here 1 m forward means end of June and Not July)
Buy $ ` 63.9500 i.e. June Ask Rate as on 10/6

 Swap Loss = (63.80 – 63.95) 2,00,000
= ` 30,000
(iv) Interest on outlay of funds
10
=  63.80 – 64.28  2, 00, 000  12% 
365
= ` 316
(v) New contract Rate
Contract A is extended on 20/6 with due date on 10/8
 New Rate = Ask Rate of August on 20/6
= 64.2500 + 0.1%
= 64.3143  ` 64.3150
(vi) Total Cost
Loss on cancellation ` 1,56,500
Swap Loss ` 30,000
Interest ` 316
Total Cost ` 1,86,816

CA – FINAL
Video 100
Money Market Hedging (MMH) for Exporter
Let us understand the MMH steps through the following example :

Today 1$ = ` 70
An Indian Exporter sells goods to an USA customer worth $ 1,00,000.
Money Receivable in 3 months time.
Interest Rate as follows :

Deposit Borrowing
USA 4% 6%
India 12% 15%
Step 1: IDENTIFY : We have a Foreign currency Receivable in 3m time

[$1,00,000]
Step 2: To Hedge, CREATE a foreign currency payable in 3m time [$1,00,000]
Step 3 : BORROW in USA PV of $ 1,00,000, discounted @ Borrowing Rate of

$ [USA]
i.e. 6% p.a.
3
76%   15% = 1.5% for 3m
12
 Borrowing Amount
$1, 00, 000
=
1.015
= $ 98,522
Step 4: CONVERT $ to ` at TODAY‟s Spot Rate

1$ = ` 70
$ 98,522 = ` 68,96,540

CA – FINAL
Step 5: INVEST ` in India @ Deposit Rate of ` [India]

i.e 12% p.a.
3
= 12% 
12
= 3% for 3m
Maturity Value= ` 68,96,540 + 3%
= ` 71,03,436
After 3 Month
Step 6: Customer pay $ 1,00,000 which is used to pay off $ Loan, which must
have grown to $ 1,00,000 FC Receivable is set off against FC Payable.
Hedging is complete as we know today itself how much ` we will be
receiving in 3m.
Video 101
Money Market Hedging (MMH) for Importer
We are an Indian Importer and have imported goods worth $1,00,000 from an USA
supplier money payable in 3 m time.
Spot Rate 1$ = ` 70
Following Interest Rate :

Deposit Borrowing
USA 4% 6%
India 12% 15%
Step 1: IDENTIFY : We have a Foreign currency payable of [$1,00,000] in 3m.

Step 2: To Hedge, CREATE a foreign currency receivable [$1,00,000] in 3 m
Step 3 : DEPOSIT PV of $ 1,00,000, in USA today @ Deposit Rate of $ [USA]
i.e. 4% p.a.
3
4%   1% for 3m
12

CA – FINAL
 Deposit Amount
$1, 00, 000
=
1.01
= $ 99,010
Step 4: CONVERT $ to ` at to find how much ` is Required to Buy $ 99,010 today

1$ = ` 70
$ 99,010 = ` 69,30,700
Step 5: BORROW ` 69,30,700 today in India for 3m @ Borrowing Rate of ` [India]

i.e 15% p.a.
3
= 15% 
12
= 3.75% for 3m
Maturity Value of Borrowing = ` 69,30,700 + 3.75%

= ` 71,90,601
After 3 Month
Step 6: Our $ Deposit in USA will grow to $ 1,00,000 in 3m, which will be used
to knock off our $ payable. Hedging is complete, as we know today itself
how much ` outflow will happen after 3m.
Video 101
Video 102
Q.64. TODAY
Step 1: IDENTIFY : We have a Foreign currency Receivable of £5,00,000 in
3m.
Step 2: To Hedge, CREATE a foreign currency Payable of £5,00,000 in 3 m
Step 3 : BORROW PV of £ 5,00,000, in UK today @ Borrowing Rate of £ [UK]

i.e. 5% p.a.

CA – FINAL
3
5%   1.25% for 3m
12
5, 00, 000
=
1.0125
= £ 4,93,827
Step 4: CONVERT : £ to ` at to Today Spot Rate

1£ = ` 56
£ 4,93,827 = ` 2,76,54,312
Step 5: INVEST ` in India for 3m @ Deposit Rate of ` [India]

i.e 12% p.a.
3
= 12% 
12
= 3% for 3m
Maturity Value of Investment = ` 2,76,54,312 + 3%

= ` 2,84,83,94
ON DUE DATE: [After 3 Month]

Step 6: £ 5,00,000 Received from customer will be used to knock off £ Loan,
which will grow to £ 5,00,000.
Hedging complete, as we know today itself that we will receiver `
2,84,83,941 after 3m
Video 103
Q.65. Evaluation of Option I: Forward contracts

3m FR : 1 £ = $ 1.6100 – 1.6140
Relevant Rate  BR of $, in terms of £ [3m FR]
1
i.e. 1$  £
1.6140
1
 On Sale of $ 3,50,000, we will receive $ $3,50,000 
1.6140
= £ 2,16,853

CA – FINAL
Evaluation of Option II : MMH

Step 1: IDENTIFY : We have a Foreign Currency Receivable of 3.5L $ in 3m.
Step 2: To Hedge, we CREATE a Foreign Currency Payable of 3.5L $ in 3 m
Step 3 : BORROW: PV of 3.5L $ @ Borrowing Rate of $ [USA]

i.e. 9% p.a.
3
9%   2.25% for 3m
12
3.5 L$
=
1.0225
= $ 3,42,298
Step 4: CONVERT $ to £ at to Today‟s Spot Rate

Spot 1£ = $ 1.5865 – 1.5905
Relevant Rate will be BR of $, in terms of £ [Spot]
1
i.e. 1$  £
1.5905
1
 On Sale of $ 3,42,298, we will Receive 3,42,298 
1.5905
= £ 2,15,214
Step 5: INVEST £ in UK for 3m @ Deposit Rate of £ [UK]
3
i.e.5% p.a 
12
= 1.25% for 3m
Maturity Value= £ 2,17,904
After 3m
Step 6: On due date, 3.5L$ Receivable from customer will be used to knock off
$ Borrowing which will grow to 3.5L $ then. Hedging is complete.

CA – FINAL
Video 104
Q.66. We are Indian Importer $ Payable = $ 50,50,000 in 3m

Evaluation of Hedging Option
(I) Forward Cover
3m FR  1$ = ` 42.5 [AR of $]
 To purchase $ 50L, we need to pay 50.5L  42.5 = ` 21,46,25,000
[FC option is Rejected as the ` outflow is exceeding ` 21 crores]
(II) MMH
Step 1: Identify  We have a FC payable of $ 50.5L in 3m.
Step 2: To Hedge, we Create a FC Receivable of $ 50.5L in 3m
Step 3 : Invest PV of 50.5L $ in USA today @ Deposit Rate of $[USA]
i.e. 4% p.a.
3
 4%  = 1%
12
 Investment Amount today
50,50,000
=
1.01
= $ 50,00,000
Step 4: CONVERT : $ to ` to calculate how much ` is required for

Buying $ 50,00,000
Spot 1$ = ` 40.35 – 40.65
Relevant Rate  AR of $, in terms of `
i.e. 1$ = ` 40.65
 For purchasing $ 50L, we will need $ 50L  40.65
= ` 20,32,50,000
Step 5: Borrow :` 20,32,50,000 in India @ Borrowing Rate of ` [India]

i.e.13% p.a
3
= 13% 
12
= 3.25%
Maturity Value of Loan
= 20,32,50,000 + 3.25%
= ` 20,98,55,625
CA – FINAL
After 3m
Step 6: FC Receivable will be set off against FC payable on Due Date.
Hedging complete. ` Outflow fixed = ` 20,98,55,625
III) Leading (Paying Early)

$50,50,000 – 3%
= $ 48,98,500
1$ = ` 40.65 [AR of $ - Spot]
 ` required today
 $ 48,98,500  40.65
= ` 19,91,24,025
` Borrowing Rate  3.25% for 3m

 Maturity Value
19,91,24,025 + 3.25%
= ` 20,55,95,556
 We go for Option III  Leading,

Since it is cheapest and below ` 21Cr Outflow.
Video 105
Q.67. (i) Evaluation of French Customer

Sale Value (in £) = 3,50,000 £
Calculation of Equivalent sale Value in FF
Spot Rate 1$ = FF 5.7485

1£ = $ 1.4920
1£ = FF?
FF FF $
= ×
£ $ £
= 5.7485  1.4920
= 8.5768

CA – FINAL
1£ = FF 8.5768
 Sale Value (in FF) = 3,50,000  8.5768
= FF 30,01,880 [Receivable in 3m]
3m Forward Cover to convert FF to £
3m FR 1$ = FF 5.7833
1£ = $ 1.4873
1£ = FF?
FF FF $
= ×
£ $ £
= 5.7833  1.4873
= 8.6015  1£ = FF 8.6015
30, 01,880
 On Sale of FF 30,01,880, we will Receive =
8.6015
= £ 3,48,995
(ii) Evaluation of Ugandan Customer:

Amount Receivable $ 2,25,000 in 3m
(a) Forward Cover
3m FR 1 £ = $ 1.4873
2, 25, 000
 On Sale of $ 2,25,000, we will Receive = £ 1,51,281
1.4873
(b) Money Market Hedging

$ Receivable $ 2,25,000  3m
$/£ 1.4920 [Today‟s Spot Rate]
Deposit Rate Borrowing Rate
UK 5% 8%
USA 3% 6%

CA – FINAL
Step 1: Identify:
We have FC Receivable of $ 2,25,000 in 3m (Asset)
Step 2: To Hedge, we create a FC Payable of $ 2,25,000 in 3m

(Liability)
Step 3: Borrow PV of $ 2,25,000 @ Borrowing Rate of $

3
i.e. 6% p.a.  = 1.5% for 3m
12
$2, 25, 000
=
1.015
= $ 2,21,675
Step 4: Convert $ to £ at Today‟s Spot Rate i.e.

1£ = $ 1.4920
 On Sale of $ 2,21,675, we will receive :
1
= $ 2, 21, 675 
1.4920
= £1,48,576
Step 5: Invest £ in UK for 3 m at Deposit Rate of £

3
i.e. 5% p.a.  = 1.25% for 3m
12
 Maturity Amount = 1,48,576 + 1.25%
= £ 1,50,433
Step 6: On due date $ 2,25,000 FC Receivable from customer will be

used to knock of $ Borrowing which will grow to $ 2,25,000 then.
Thus Hedging complete. Since option (a) higher £ Inflow of £
1,51,281; we will choose forward cover.
(iii) Yes, uganda customer‟s offer for payment in US$ should be accepted as
USD is a strong and reliable currency. There is no forward cover
available on Uganda shillings.

CA – FINAL
Video 106
Q.68. Method 1: Money Market Hedging

Step 1: Identify:
We have FC Receivable of DM 7,50,000 in 3m (Asset)
Step 2: To Hedge, we create a FC Payable of DM 7,50,000 in 3m (Liability)
Step 3: Borrow PV of DM 7,50,000 @ Borrowing Rate of DM

3
i.e. 3% p.a.  = 0.75% for 3m
12
7,50,000
=
1.0075
= DM 7,44,417
Step 4: Convert DM to £ at Today‟s Spot Rate i.e.

1£ = DM 2.3834
 on sale of DM 7,44,417;
We will receive :-
7,44,417
=
2.3834
= £3,12,334
Step 5: Invest £ in UK for 3 m at Deposit Rate of £

3
i.e. 6% p.a.  = 1.5% for 3m
12
 Maturity Amount
= £ 3,12,334 + 1.5%
= £ 3,17,019
Step 6:On due Date DM 7,50,000 FC Receivable from customer will be used
to knock off DM Borrowing which will grow to DM 7,50,000 then.
Thus Hedging is complete.

CA – FINAL
Method 2: Forward Contract

3m FR  1 £ DM 2.3688
 On Sale of DM 7,50,000, we will receive:
7,50,000
= £ 3,16,616
2.3688
Since £ Receivable in higher in Method 1,
we will choose Money Market Hedging.
Video 107
Q.69. £ Exposure :
£ Receivable :£ 1,38,000
In 3m
£ Payable : £ 4,80,000
 £ Payable (Net) = £ 3,42,000 in 3m
Option 1: Forward Cover

3m FR 1$ = £ 0.9520 – 0.9545
We want to buy £, Relevant Rate will be Ask Rate of £ in terms of $

1
i.e. 1£ = (AR of £)
0.9520
1
 For Purchase of £ 3,42,000 we will have to pay £3,42,000 
0.9520
= $ 3,59,244
Option 2: Money Market Hedging

Step 1: We have a Fc payable of £ 3,42,000 in 3m
Step 2: To Hedge we have to create a FC Receivable of £ 3,42,000 in 3m.
Step 3 : Invest PV of £ 3,42,000 in UK

Today at Deposit Rate 10% p.a.

CA – FINAL
3
i.e. 10% p.a. 
12
= 2.5% for 3 months.
 Investment Amount Today :
£ 3, 42, 000
= £ 3,33,659
1.025
Step 4: Convert £ to $ at Today‟s spot rate

1$ = £ 0.9830 – 0.9850 spot
1 1
 1£ = $ –
0.9850 0.9830
Relevant Rate = AR of £ in terms of $
 For Purchasing £ 3,33,659;
£3, 33, 659
= $ 3,39,429
0.9830
Step 5 : Borrow $ 3,39,429 in US @ Borrowing Rate

3
i.e. 13% p.a.  = 3.25% for 3 months
12
 Maturity Value of Loan :-

= $ 3,39,429 + 3.25%
= $ 3,50,460
Step 6: FC Receivable will be set off against FC payable on due date.

Hedging complete.
We will choose Option 2: Money Market Hedging as it result in lower
$ Outflow.
€ Receipt :
Option 1: Forward cover
4m FR 1€ = $ 1.9510 – 1.9540
We want to sell €. Relevant Rate will be Bid Rate of € in terms of
$ i.e. 1.9510.
 On Sale of € 5,90,000; we will receive
€5,90,000  1.9510
= $ 11,51,090

CA – FINAL
Option 2: Money Market Hedging

Step 1 : We have FC Receivable of € 5,90,000 in 4m
Step 2 : To hedge, we create a FC payable of € 5,90,000 in 4m
Step 3 : Borrow PV of € 5,90,000 @ Borrowing Rate of €
4
i.e. 16% p.a.  = 5.33% for 4 Months.
12
Borrowing Amount
€ 5, 90, 000
=
1.0533
= € 5,60,144
Step 4: Convert € into $ at Today‟s Spot Rate

1€ = $ 1.8890 – 1.8920
Relevant Rate = Bid Rate of € in terms of $
 For Sale of € 5,60,144;
=€ 5,60,144  1.8890
= $ 10,58,112
Step 5 : Invest $ in US for 4m at Deposit Rate of $

4
i.e. 11.50% p.a.  = 3.83% for 4m
12
 Maturity Value
= $ 10,58,112 + 3.83%
= $ 10,98,638
Step 6: On Due Date, € 5,90,000 FC be Receivable from customer will get set
off against €.
Borrowing which will grow to € 5,90,000 then. Thus, Hedging is
complete.
We will choose Option 1: Forward Contract as it result in higher $
inflow.

CA – FINAL
Video 108
Q.70. Calculation of Gain / Loss

(a) Under Reverse Forward
Original Position : SELL CHF @ ` 27.25
To Cancel : BUY CHF @ ` 27.52
(1m FR  2m)
 Loss on cancellation
= (27.25 – 27.52)10,000
= ` 2700
(b) Cancellation through money
Market Hedging
India  12%
Switzerland  6%
Step 1: Identify  We have FC payable of CHF 10,000 in 1m time
Step 2 : To Hedging create FC Receivable of CHF 10,000 in 1m
Step 3 : Invest PV of CHF 10,000 in Switzerland today
1
6%  = 0.5% for 1 month
12
 Investment Value
10,000
=
1.005
= CHF 9,950
Step 4: Convert CHF to ` at Spot Rate
1 CHF = ` 27.30 – 27.35
 To Purchase CHF, CHF 9,950  27.35
= ` 2,72,133
Step 5: Borrow ` @ Borrowing Rate
1
i.e. 12% = 1% for 1 Month
12
 Maturity Value,
= 2,72,133 + 1%
= 2,74,845
Step 6 : On Due Date, ` borrowing will mature at ` 2,74,854 and on the
other hand our CHF Investment would have grown to CHF
10,000. Under original contract we will see this CHF 10,000 to
Bank.
 Loss on MMH = 2,74,854 – 2,72,500 = ` 2,354
CA – FINAL
(c) Penalty = ` 2000 Today

Thus for amount after 1 month,
1
We will use = 12% p.a 
12
= 1%
= 2000 + 1%
= ` 2020
(d) On Due Date 1CHF = ` 27.54

Original Position : SELL @ ` 27.25
To Cancel : BUY ` 27.54
 Loss = (27.25 - 27.54) 10,000

= ` 2,900
Comparing all 4 options, the cheapest option available with the customer
is option (c) i.e penalty.
Video 109
Introduction
$ 1L (3m)
A B
$ 30K (3m)
Netting:
$ 70K (Net)
A B

CA – FINAL
Video 110
Q.71. Step 1 : Covering all amount to common currency £

Amount Spot Rate Amount (£)
` 1,44,38,100 1£ = ` 68.10 £ 2,12,013
$ 1,06,007 1£ = $ 1.415 £ 74,917
MYR 14,43,800 1£ = MYR 10.215 £ 1,41,341
$ 80,000 1£ = $1.415 £ 56,537
Step 2: Netting
India Malaysia USA
£ 2,12,013 (£ 2.12.013)
(£ 74,917) £ 74,917
£1,41,341 (£ 1,41,341)
(£ 56,537) £56,537
£ 1,37,096 (£ 1,27,209) (£ 9887)
Thus, USA should pay £ 9887 and Malaysia should pay £ 1,27,209 to India.
Video 111
Q.72. Step 1: Covering all amounts to common currency $
Amount Spot Rate Amount
EL 240 1$ = € 0.90 $ 267
¥ 12,000 1$ = ¥ 120 $ 100
EL 120 1$ = € 0.90 $ 133
£ 75 1$ = £ 0.70 $ 107
¥ 12,000 1$ = ¥ 120 $ 100
Step 2:Netting
UK Euroland Japan
($267) $267
($100) $100
$133 ($133)
$107 ($107)
($100) $100
($260) $193 $67
Thus, UK has to pay $ 193 to Euroland and $ 67 to Japan.
CA – FINAL
Video 112
Arbitrage is an opportunity where we can earn Risk Free Profit.

Triangular Arbitrage is the Opportunity to earn Risk Free Profit due to mispricing of
Foreign Exchange Quotes between three countries‟ currencies.
For Eg –
1$ = ` 60
1£ = $2
1£ = ` 100
Let say we have ` 6000

Path 1:
` $ £ `
 6000 ……… $100 ……… £50 ……….` 5000
Path 2:
` £ $ `
 6000 ……… $60 ……… £120 ……….` 7200
 Path 2 will give us Profit, as we end up with more Rupees, than what we
invested, within a day; sure shot profit – Arbitrage!
Video 113
Q.73. ` £ $ `
(1) Converting ` to £
1£ = ` 81.2 / 81.90
Relevant Rate = 81.90
` 1,00,00,000

81.90
= £1,22,100

CA – FINAL
(2) Converting £ to $
1£ = $ 2.14/2.156
We want to sell £
 Bank will buy £ @ Bid Rate
= £ 1,22,100  2.14
= $ 2,61,294
(3) Converting $ back to `

1$ = ` 38.6/39
We want to sell $. Bank will buy $ @ Bid Rate.
= $ 2,61,294  38.6
= ` 1,00,85,948
Video 114
Q.74. 1` = $ 59.25 – 59.35

1` = £ 102.5 – 103.00
1$ = £ 1.70 – 1.72
Available $ = $ 1,00,00,000
Ex. Margin = 0.125%
$ £ ` $
(1) Converting $ to £
1£ = $ 1.70 – 1.72
+ Ex. Margin = 0.125%
1.72215
$1,00,00,000 =
£ 58,06,695
1.72215

CA – FINAL
(2) Converting £ to `
1£ = `102.5 – 103.00
– Ex. Margin = (0.125%)
102.3719
£ 58,06,695  102.3719
= ` 59,44,42,399  ` 59,44,42,400
(3) Converting ` to $
1$ = `59.25 - 59.35
+ Ex. Margin = 0.125%
= $ 59.4242
` 59, 44, 42, 400
59.4242
= $ 1,00,03,372
 Gain = 1,00,03,372 – 1,00,00,000
= $ 3,372
Video 115
Q.75. The company can proceed in the following ways to realise arbitrage gain:
(a) Buy Rupees from US$ at Mumbai:
` 64.10  US$ 2,00,00,000
= ` 128,20,00,000
(b) Convert Rupees from US$ at London:
` 128,20,00,000/99.10
= GBP 1,29,36,427.85
(c) Convert GBP into US$ at New York
= GBP 1,29,36,427.85  1.5530

CA – FINAL
= US$ 2,00,90,272.45
There is a Net Gain of = US$ 2,00,90,272.45 - US$ 2,00,00,000
= US$ 90,272.45
Video 116
Interest Rate Parity Theorem
USA Spot India

R = 6% 1$ = ` 50 R = 10%
$ 2,000  ` 1,00,000  ` 1,00,000
+ 6% + 10%
$ 2,120 ` 1,10,000
Equating the Final Payoff:-
$ 2120 = ` 1,10,000
` 1,10,000
 1$ =
2,120
1$ = ` 51.89
This rate is caused as the Theoretical 1 year Forward Rate.
According to this Theorem,
Even though Indian Interest Rate is greater than US Interest Rate, STILL there
is PARITY because the benefit of higher Interest Rate in India is ERODED by
Depreciation in `
IRPT Formula for calculation of Theoretical forward Rate

1  rh F

1  rf S0
rh = Risk free Interest Rate of Home
rf = Risk free Interest Rate of Foreign
S0 = Spot Rate at the end of year 0
F = Forward Rate
Always FIRST IDENTIFY the COUNTRY for which quote is given.

CA – FINAL
Eg. 1$ = ` 50
Home Currency = India
1` = $ 0.02
Home Currency = USA
Solving the example,
1  0.1 F

1  0.06 50
1.1  50
F
1.06
 F = ` 51.89
Video 117
Q.76. Spot 1$ = £ 0.7570

rh = 7.5%  3/12 = 1.875%
rf = 3.5%  3/12 = 0.875%
1  rh F

1  rf S0
1.01875 F

1.00875 0.7570
F = 0.7645
 3m FR is 1$ = £ 0.7645
Video 118
Q.77. Spot 1¥ = $ 0.09

1  rh F

1  rf S0
1  0.035 F

1  0.0275 0.09
1.035
 0.09  F
1.0275
F = 0.0907
 6m FR, 1 ¥ = $ 0.0907

CA – FINAL
Video 119
Q.78. Spot 1£ = $1.5

rh = 8%
rf = 6%
1yr FR
1  rh F

1  rf S0
1.08 F

1.06 1.50
F = 1.5283
 1£ = $ 1.5283
2yr FR
1  rh F

1  rf S1
1.08 F

1.06 1.5283
F = 1.5571
 1£ = $ 1.5571
3yr FR
1.08 F

1.06 1.5571
F = 1.5865
 1£ = $ 1.5865
Another way of calculating year 2 & year 3 :-
2 yr FR:
1.08
2
F

1.06
2
1.5
1.1664 F

1.1236 1.5

CA – FINAL
 1£ = $1.5571
3yr FR :
1.08
3
F

1.06
3
1.5
1.2597 F

1.1910 1.5
 1£ = $ 1.5865
Video 120
Q.79. (a) Since 6m Borrowing Rate in USA is lower, we can expect US $ to be at a

premium in the Indian Forward Market.
(b) Spot 1$ = ` 55.50
rh = 10%  6/12 = 5% for 6m
rf = 4% 6/12 = 2% for 6m
1  rh F

1  rf S0
1.05 F

1.02 55.5
F = 57.13
 6m FR  = 1$ = ` 57.13
(c) 1$ = ` 55.5 Spot

1$ = ` 57.13 6m FR
 %  /  in Product ($)
F–S
=
S
57.13–55.5 12
=   100
55.5 6
= 5.87% p.a

CA – FINAL
Video 121
Q.80. (1) Spot 1$ = FF 7.05

Home Currency = FF (France)
Foreign currency = $ (USA)
3
rf = 11.5%  = 2.875% (3m)
12
3
rh = 19.5%  = 4.875% (3m)
12
1$ = FF? (3m FR)
1  rh F

1  rf S0
1.04875 F

1.02875 7.05
 3m FR 1$ = FF 7.1871
1$ = FF 7.05 Spot
1$ = FF 7.1871 3m FR
F  S 12
% Appreciation in $ =  100
S 3
7.1871  7.05 12
=  100
7.05 3
= 7.78%
(2) Spot 1$ = FF 7.05
6
rf for 6m = 12.25% 
12
= 6.125%
6
% Appreciation in $ = 6.3% p.a. 
12
= 3.15%
 6m FR of $ = FF 7.05 + 3.15%
= FF 7.2721
CA – FINAL
1  rh F

1  rf S0
1  rh 7.2721

1.06125 7.05
 rh = 0.09468
i.e. 9.47%
(3) Spot 1$ = FF 7.05

rh for 1yr = 20%
1yr FR 1$ = FF 7.52
1  rh F

1  rf S0
1.2 7.52

1  rf 7.05
 rf = 0.125
i.e. 12.5%
FS
% appreciation =
S
7.52  7.05
=  100
7.05
= 6.67%
Video 122
Q.81. SGD Receivable = 4,00,000 SGD in 6m

Spot Rate 1GBP = 2.5 SGD
 For IRPT,
Singapore  Home
UK  Foreign

CA – FINAL
rh = 15%
rf = 12%
If £ was to
(a) Gain by 4%
Expected Spot after 6m :
1£ = SGD 2.5 + 4%
1£ = SGD 2.6
(b) Lose by 2%
Expected Spot after 6m :
1£ = SGD 2.5 – 2%
1£ = SGD 2.45
(c) Remains stable at present level

Expected spot after 6m :
1£ = SGD 2.5
Calculation of 6m FR :
6
rh = 15%  = 7.5% for 6m
12
6
rf = 12%  = 6% for 6m
12
1  rh F

1  rf S0
1.075 F

1.06 2.5
F = 2.5354
 6m FR 1 GBP = SGD 2.5354
 For SGD 4,00,000
400000
GBP =
2.5354
= 1,57,766 GBP

CA – FINAL
Calculation of £ Inflow if FC is not taken

Particular (a) (b) (c)
SGD Receivable 4,00,000 4,00,00 4,00,000
Expected Spot 1£ = SGD 2.6 1£ = SGD 2.45 1£ = SGD 2.5
£ Receivable £ 1,53,846 £ 1,63,265 £ 1,60,000
£ Receivable (forward cover) £ 1,57,766 £ 1,57,766 £ 1,57,766
In case a), we should take the Forward Cover as Receivable is higher.
In case b) and c), we should not take the Forward Cover as Receivable is
lower.
Video 123
Q.82. 1 SGD = ` 20.725 Spot

1 SGD = ` 20.687 90 days FR
 Home = India ( ` )
Foreign = Singapore (SGD)
rf = 9.5% p.a.
(a) Since 90 day FR of SGD in terms of ` has depreciated, we can say that
rh (Interest rate for India) must be lower than 9.5% p.a.
Calculation of rh
According to IRPT Formula:
1  rh F

1  rf S0
1  rh 20.687

1.02375 20.725
 1 + rh = 1.0219
rh = 0.0219 i.e. 2.19% for 90 days i.e. 2.19  360/90 = 8.76% p.a
(b) 1` = SGD 0.04795
1SGD = ` 20.8550 90day FR
1SGD = ` 20.7250 Spot
CA – FINAL
Since 90 days FR of SGD in terms of ` has appreciated, we can say

that rh (Interest rate for India) must be higher than 9.5% p.a.
Calculation of rh
According to IRPT Formula:
1  rh F

1  rf S0
1  rh 20.8551

1.02375 20.725
 1 + rh = 1.0302
rh = 0.0302 i.e. 3.02% for 90 days i.e. 3.02  360/90 = 12.08% p.a
(c) 1SGD = ` 20.725 spot

90
rf = 9.5% p.a.  = 2.375% for 90 days
360
90
rh = 8% p.a.  = 2% for 90 days
360
1  rh F

1  rf S0
1.02 F

1.02375 20.725
 90 days FR, 1SGD = 20.8012
Video 124
Covered Interest Arbitrage
(V116 Example Taken)
1$ = ` 50 Spot
India Int. Rate (rh) = 10%
USA Int. Rate (rf) = 6%
Theoretical 1yr FR  1$ = ` 51.89
Actual 1yr FR  1$ = ` 54
CA – FINAL
Borrow in Home and Invest in Borrow in Foreign and Invest in

Foreign Home
Today Today
Step 1: Step 1:
Borrow ` 1,00,000 in India @ 10% Borrow $ 2000 @ 6% in USA
Step 2: Step 2:
Convert ` to $ at Today‟s spot rate Convert $ to ` 1,00,000
$ 2,000
Step 3: Step 3:
Invest $ 2000 in USA @ 6% Invest in India ` 1,00,000 @ 10%
(2000 + 6%) = $ 2120 (1,00,000 + 10%) = `1,10,000
Step 4: Step 4 :
Take a 1yr Fr to Convert $ to ` Take a FR to convert ` to $
1$ = ` 54 1$ = ` 54
On Due Date (After 1yr) On Due Date (After 1 yr)
Step 5: Step 5:
Realise Investment Maturity Realise Investment Maturity
Proceeds of $ 2120 Proceeds `1,10,000
Step 6: Step 6:
Convert $ to ` (under the 1yr FC) Convert ` to $ (Under FC)
= $ 2120  54 $ 2037 i.e.
= `1,14,180  1,10,000 
 
 54 
Step 7: Step 7:
Repay ` Loan Repay $ Loan
= 1,00,000 + 10% = (2000 + 6%)
= `1,10,000 = $ 2120
 Gain = 1,14,480 – 1,10,000  Loss = 2120 – 2037
= ` 4,480 = $ 83
Shortcut of finding out which method will give profit / loss :
1$ = ` 50 Spot
1$ = ` 54 1yr FR (Actual)
CA – FINAL
rf = 6%
We have to find out the Theoretical
1  rh F
 ,where
1  rf S
F = Actual FR
S = Actual Spot Rate
rf = Foreign Interest rate
1  rh 54
 
1  0.06 50
1 + rh = 1.1448
 rh = 14.48%
Since 14.48% > 10%
Thus borrowing in India is cheaper.
Video 125
Q.83. I. Evaluation for Arbitrage on a 3m basis

Today
Step 1: Borrow ` 1,00,000 for 3m
 3 
 8%    2%
 12 
Step 2: Convert ` to £ at Today‟s spot rate
1£ = ` 52.60 – 52.70
` 1,00000
= £ 1,898
52.70
3
Step 3: Invest £ in UK @ 5% p.a.  = 1.25% for 3m
12
[£ 1,898 + 1.25%] = £ 1,922
Step 4: Take a 3m FC to convert £1922 to ` @ Bid Rate of £ in terms of `
1£ = ` 52.60 + 0.20
1£ = ` 52.80 (3m FR)

CA – FINAL
On Due Date
Step 5: Realize £1922 Investment Maturity Proceeds
Step 6: Convert £1,922 to ` (under FC)
£ 1922  52.8
=` 1,01,482
Step 7: Repay ` Loan
= 1,00,000 + 2%
= ` 1,02,000
 Loss = 1,02,000 – 1,01,482
= ` 518
 There is NO SCOPE for Covered Interest Arbitrage if we Borrow ` for
3m and invest in foreign.
II. Evaluation for Arbitrage on a 6m basis

Today
6
Step 1: Borrow ` 1,00,000 for 6m @ 10% p.a. = 5% for 6m
12
Step 2: Convert ` to £ at Today‟s Spot rate i.e. 52.70
` 1,00,000
= £ 1,898
52.70
6
Step 3: Invest £ in UK @ 8% p.a.  = 4% for 6m
12
 £ 1898 + 4% = £ 1974
Step 4: Take a 6m FC to convert £ 1974 to ` @ Bid Rate of £ in terms of `
1£ = 52.60 + 50
1£ = 53.10 (6m FR)
On Due Date
Step 5: Realize £1974 Investment Maturity Proceeds
Step 6: Convert £1898 to ` (Under FC)
= £ 1974  53.10
= ` 1,04,819
CA – FINAL
Step 7: Repay ` Loan

= 1,00,000 + 5%
= ` 1,05,000
 There is NO SCOPE for covered Interest Arbitrage if we Borrow ` for
3m and invest in foreign.
NOTE :
In I), ICAI taken £1897.53 and £1921.25. We have rounded it off to £1898
and £1922
In II), ICAI has taken £1897.53 and £1973.43. We have rounded it off to
£1898 and £1974.
Video 126
Q.84. Calculation of Theoretical FR (3m)

Spot 1 DM = CD 0.665
3m FR 1DM = CD 0.670 (Actual)
 Home = CD
 Foreign = DM
3
rh = 9% p.a.  = 2.25% for 3m
12
3
rf = 7% p.a.  = 1.75% for 3m
12
1  rh F

1  rf S
1.0225 F
 
1.0175 0.665
3m FR, 1DM = CD 0.668 (Theoretical 3M FR)
1DM = CD 0.670 (Actual 3m FR)
There is a difference between Theoretical and Actual FR
 There is an Arbitrage opportunity.
Thus, we will calculate Theoretical rh

Calculation of Theoretical rh

CA – FINAL
1  rh F

1  rf S0
1  rh 0.670

1.0175 0.665
 1 + rh = 1.02515
rh = 2.515% for 3m
 For 12m,
12
rh = 2.515 
3
= 10.06%
Actual rh (9%) is lower than Theoretical rh (10.06%)
Thus, borrowing from Home (Canada) is cheaper.
Actual rh < Theoretical rh,
Our Strategy for Arbitrage is Borrow at Home (CD) and Invest in foreign (DM)
Following steps are to be carried out:

Today
Step 1: Borrow CD 1,000 @
3
= 9% p.a.
12
= 2.25% p.a.
Step 2: Convert CD to DM
1DM = CD 0.665
1000CD

0.665
= 1503.76 DM
Step 3: Invest DM in the money market for 3m @
3
7% p.a.  = 1.75%
12
1503.76 + 1.75% = DM 1530.08
Step 4: Take a 3m FC to convert
DM into CD @
1DM = CD 0.670
On Due date
Step 5: Realise DM 1530.08 Investment Maturity Proceeds

CA – FINAL
Step 6: Convert DM 1530.08 (Under FC) into CD

= 1530.08  0.670
= CD 1025.15
Step 7: Repay CD Loan
1000 + 2.25%
= CD 1022.5
 Arbitrage gain = 1025.15 – 1022.5
= CD 2.65
Video 127
Interest Rate Differential
The Interest Rate Differential in two currencies is reflected in the appreciation or

depreciation in those country‟s currencies.
Video 128
Q.85 (i) Sale Value: 50,000 DM

Money Receivable in 90 days
Home Currency : $
Spot Rate: 1$ = DM 1.71
90d FR: 1$ = DM 1.70
To hedge its foreign currency receivables (DM), this company would
enter into a 90 day forward cover to sell DM and receive $.
On Sale of 50,000 DM under the Forward Cover, we would receive
50,000/1.70 = $29,412.
Based on today‟s Spot Rates, we would receive 50,000/1.71 = $29,240.
Therefore, due to Forward Cover, we are receiving $172 extra.
(ii) Spot Rate: 1$ = DM 1.71
90d FR: 1$ = DM 1.70

CA – FINAL
Here, we can see that $ is depreciating against DM in the Forward

Market. Therefore, it is obvious that DM is appreciating against $ in the
Forward Market. Therefore, DM is at a Forward Premium.
(iii) Calculation of % Depreciation in $

Spot  1$ = DM (1.71)
90d FR  T$ = DM 1.70
%  of $
F - S 365
   100
S 90
1.70 -1.71 365
  100
1.71 90
= (2.37% p.a)
Video 129
Purchasing Power Parity Theorem
USA Spot Rate India

$1000 1$ = ` 70 `70,000
Inflation 6% Inflation 10%
After 1yr $ After 1yr $

1060 77000
$ 1060 = ` 77,000
`77000
1$ =
1060
1$ = ` 72.64
(Theoretical 1yr FR – PPPT)
Formula

CA – FINAL
1  rh F
 where,
1  rf S0
rh = Home Inflation Rate

rf = Foreign Inflation Rate
F= Forward Rate (Theoretical)
S0 = Spot Rate at the end of Year 0
1.10 F

1.06 70
 F = ` 72.64/$
Note : In PPPT, if the Actual 1yr FR is not equal to the Theoretical FR, do not
assume that there is arbitrage opportunity as the inflation rates are NOT risk free.
Video 130
Q.86. Calculation of Theoretical FR (PPPT)

 At the end of yr 1
1  rh F

1  rf S0
1.08 F

1.04 46
 Theoretical 1yr FR 1$ = 47.7692
 At the end of yr 4
1  rh F

1  rf S0
1.08
4
F

1.04
4
46
1.3605 F

1.1699 46
 Theoretical 4 yr 1$ = ` 53.4943

CA – FINAL
Video 131
Q.87. (a) Calculation of Spot Rates

$ 22.84 = SGD 69
 1$ = SGD 3.0210
SGD 69 = Rubles 3240

 1SGD = Rubles 46.9565
$ 22.84 = Rubles 3240

 1$ = 141.8564
(b) Actual Exchange Rate :

1$ = SGD 1.63
1$ = Rubles 250
Company Pendrive prices (in $)

Place Price Spot Rate Price (in $)
USA $ 22.84 N.A $ 22.84
Singapore SGD 69 1$ = SGD 1.63 $ 42.33
Moscow Rubles 3240 1$ = Rubles 250 $ 12.96
Thus, Pendrive must be bought at Moscow at $ 12.96 or 3240 Rubles per

pendrive

CA – FINAL
Video 132
Nostro, Vostro, Loro
If Bank of America has an SBI A/c, SBI will call that A/c NOSTRO A/c (My A/c
with You) and BOA will call that SAME A/c as VOSTRO A/c.
(Your A/c with Us)
Now, if a small Indian Bank uses SBI‟s A/c with Bank of America, it will be called
as LORO A/c.
Same A/c is called by three different names by three different entities.

(For more theory content on this concept, read Theory Section below)
Video 133
Exchange Position and Cash Position
Exchange position is a statement where we will record the buy and sell of Foreign
Currency the moment we AGREE to buy/sell FC.
Cash position is that position where we record the debit and credit when it actually
happens.
(For more theory content on this concept, read Theory Section below)

CA – FINAL
Video 134
Q.88. Exchange Position

Particulars BUY (SF) SELL (SF)
 Opening 50,000
Overbought
 Purchased a Bill 80,000
on Zurich
 Sold forward TT 60,000
 FC cancelled 30,000
 Remitted by TT 75,000
 Draft on Zurich 30,000
contract cancelled
 Buy TT 5,000
1,65,000 1,65,000
 Buy FR TT (Bal.) 10,000
 Closing 10,000
Overbought
Cash Position
Particulars Debit (SF) Credit (SF)
 Opening Balance 1,00,000
 Remittance by TT 75,000
25,000
 Buy TT 5,000
 Closing balance 30,000
ALWAYS first close Cash Position.

CA – FINAL
Video 15
Video 135
Q.89. Exchange Position

Particulars BUY (£) SELL (£)
Opening Overbought 35,000
DD Purchased 12,500
Purchased Bill on London 40,000
Sold Forward TT 30,000
Forward Purchase contract cancelled 15,000
Remitted by TT 37,500
Draft on London cancelled 15,000
Buy TT 1,17,500
2,20,000 82,500
Sell Forward 1,30,000
Closing Overbought 7,500
Cash Position
Particulars Debit (SF) Credit (SF)
Opening Balance 65,000
Remittance by TT 37,500
1,02,500 -
Buy TT 1,17,500
Closing balance 15,000
Video 136
Q.90. (1) Spot Rate

1 € = ` 51.50 –51.55
1SGD = ` 27.20 – 27.25
Selling Price p.u. = € 500
Purchase Price p.u. = SGD 800

CA – FINAL
Calculation of Notion P/L ( ` ) based on today‟s Spot Rate

= 2400u [(500€  51.50) – (800SGD  27.25) – 1,000 – 1,500]
= `34,80,000
Calculation of Actual P/L ( ` ) based on Actual Spot Rate on Due Date

1€ = ` 52.00 – 52.05
1SGD = ` 27.70 – 27.75

= 2,400u [(500€  52) – (800 SGD  27.75) – 1,000 – 1,500]
= ` 31,20,000
 Loss due to Transaction Exposure = ` 3,60,000
(2) Calculation of Notion P/L ( ` ) based on Today’s Spot Rates.

1€ = ` 51.75 – 51.80
1 SGD = ` 27.10 – 27.15
2,400 u[` 25,000 – 800 SGD  27.15 – 1,000 – 1,500]
= ` 18,72,000
Calculation of Actual P/L (`) on Due Date, based on Actual Spot Rates on
Due Date
= 2,400 [`25,000 – 800 SGD  27.75 – 1,000 – 1,500]
= ` 7,20,000
 Loss due Transaction Exposure = ` 11,52,000

Calculation of Operational Exposure:
Revised SP  ` 25,000
For customer, Purchase price based on Original Spot Rate
1
= 25,000   € 485.44
51.50
For customer, Purchase price based on Revised Spot Rate
1
= 25,000   € 483.09
51.75
 %  in price

CA – FINAL
485.44  483.09
=  100
485.44
= 0.48%
 %  in Demand = 0.48  1.5
= 0.72%
 Revised Demand
= 2,400 u + 0.72%
= 2,417u
Calculation of Actual Profit / Loss based on Spot Rate on Due Date

= 2,417[` 25,000  (800 SGD  27.75) – 1,000 – 1,500]
= ` 7,25,100
 Loss due to operational Exposure = ` 11,46,900
Alternatively,
Actual Profit / Loss on Due Date based on Spot Rate on Due Date:
= 2,417u [` 25,000 – (800SGD  27.75) – 1,500] – 24,00,000
= ` 7,42,100
 Loss due to operational Exposure = ` 11,29,900
Video 137
Q.91. (i) Net exposure of each foreign currency in Rupees

Net Net
Inflow Outflow Spread
Inflow Exposure
(Millions) (Millions) (Millions) (Millions)
US$ 40 20 20 0.81 16.20
FFr 20 8 12 0.67 8.04
UK£ 30 20 10 0.41 4.10
Japan Yen 15 25 -10 -0.80 8.00
(ii) The exposure of Japanese yen position is being offset by a better forward
rate

CA – FINAL
Video 138
Q.92. Calculation of Theoretical FR [2yr FR]

Spot 1$ = £0.75
rh = 5% p.a
rf = 8% p.a
e rhn F

e rf n S0
e0.052 F

e0.082 0.75
e0.1 F
0.16

e 0.75
1.105 F

1.1735 0.75
= 0.706
 Theoretical 2 year FR:
1$ = £ 0.706
Actual 2 year FR :
1$ = £ 0.85
Actual FR ≠ Theoretical FR, there is an Arbitrage opportunity
Strategy  Borrow at Home & Invest in Foreign
Step 1: Borrow £ 1,00,000 today @ 5% p.a. for 2 years

[1,00,000  1.105 = £ 1,10,500]
Step 2: Convert £1,00,000 to $ at Today‟s Spot Rate
1$ = £ 0.75
 £ 1,00,000 > $ 1,33,333
Step 3: Invest $ in USA @ 8% p.a.
[1,33,333  1.1735 = $ 1,56,467]
Step 4: Take a FC to Convert $ to £ at 2year FR (Actual)
1$ = £ 0.85

CA – FINAL
On due Date
Step 5 : Realize $ Maturity Proceeds $ 1,56,467
Step 6: Convert to $ to £ at 2 year FR
= 1,56,467  0.85
= £ 1,32,997
Step 7: Repay £ Loan  £ 1,10,500
 Arbitrage Gain = £ 22,497
Video 139
Q.93. (a) Evaluation of Currency of Borrowing

Option 1: Borrow in $
Amount Borrowed $ 100
(+) Interest 5.5% for 6m $ 2.75
Total MV ($) (6m) $ 102.75
6m FR (AR of $) 1$ = ` 36.40
 ` Outflow = $ 102.75  36.40
= ` 3,740.1
Option 2: Borrow in `
[Equivalent Amount]
Spot Rate [AR of $] 1$ = ` 36.1

 $ 100 = ` 3,610
Borrow ` 3,610.00
(+) Interest 11.50% ` 207.58
For 6m
MV[6m] ` 3,817.58
 Company should go for $ Borrowing as ` outflow is lower.

CA – FINAL
(b) Calculation of Indifference Interest Rate

(i) ` Borrowing
3
3m Interest Rate = 12%  = 3%
12
6
6m Interest Rate = 11.50% 
12
= 5.75%
Pay off (6m) = Pay off (3m)
1.0575 = (1.03)(1 + r)
r = 0.0267
i.e. 2.67% for 3m
12
i.e. 2.67 
3
= 10.68 % p.a
(ii) $ Borrowing
3
3m Interest Rate = 6%  = 1.5%
12
6
6m Interest Rate = 5.5%  = 2.75%
12
Payoff(6m) = Payoff (3m)
(1.0275) = (1.015) (1 + r)
1 + r = 1.01232
r = 0.01232
 1.232% for 3m
12
 Annual = 1.232 
3
= 4.928%

CA – FINAL
Video 140
Q.94. Strategy 1: This strategy is covered by High Risk: Low Reward category
and worst as leaves all exposures unhedged. Although this strategy does not
involve any time and effort, it carries high risk.
Strategy 2: This strategy covers Low Risk: Reasonable reward category as

the exposure is covered wherever there is anticipated profit otherwise it is left.
Strategy 3: This strategy is covered by High Risk: High Reward category as

to earn profit, cancellations and extensions are carried out. Although this
strategy leads to high gains but it is also accompanied by high risk.
Strategy 4: This strategy is covered by Low Risk : Low Reward category as

company plays a very safe game.
Diagrammatically all these strategies can be depicted as follows:

High Risk
Low Strategy 1 Strategy 3 High
Reward Strategy 4 Strategy 2 Reward
Low Risk
Video 141
Q.95. (A) To cover payable and receivable in forward Market

Amount payable after 3 months $7,00,000
Forward Rate ` 48.45
Thus Payable Amount (`) (A) ` 3,39,15,000
Amount receivable after 2 months $ 4,50,000
Forward Rate ` 48.90
Thus Receivable Amount (`) (B) ` 2,20,05,000
Interest @ 12% p.a. for 1 month (C) ` 2,20,050
Net Amount Payable in (`) (A) – (B) – (C) ` 1,16,89,950

CA – FINAL
(B) Assuming that since the forward contract for receivable was already
booked it shall be cancelled if we lag the receivables. Accordingly any
profit/ loss on cancellation of contract shall also be calculated and shall
be adjusted as follows:
Amount Payable ($) $7,00,000
Amount receivable after 3 months $ 4,50,000
Net Amount payable $2,50,000
Applicable Rate ` 48.45
Amount payable in (`) (A) ` 1,21,12,500
Profit on cancellation of Forward cost ` 2,70,000
(48.90 – 48.30) × 4,50,000 (B)
Thus net amount payable in (`) (A) + (B) ` 1,18,42,500
Since net payable amount is least in case of first option, hence the
company should cover payable and receivables in forward market.
Note: In the question it has not been clearly mentioned that whether quotes
given for 2 and 3 months (in points terms) are premium points or
direct quotes. Although above solution is based on the assumption
that these are direct quotes, but students can also consider them as
premium points and solve the question accordingly.
Video 142
Q.96. Net Cost under each of the Options is as follows:

(i) Loan from German Bank Cost = 5% + 0.25% = 5.25%
(ii) Loan from US Parent Bank
Effective Rate of Interest 

4%  4.35%


1- 0.08 
Premium on US$ 
1.05  0.96%
-1 
 1.04 
Net Cost 5.31%

CA – FINAL
(iii) Loan from Swiss Bank
Effective Rate of Interest 

3%  3.26%

1- 0.08 
Premium on US$ 
1.05  1.94%
 1
 1.03 
Net Cost 5.20%
Thus, loan from Swiss Bank is the best option as the Total Outflow
including Interest is Less i.e. €105200
Video 143
Q.97. (i) Money market hedge

For money market hedge Indian Firm shall borrow in US$ and then
translate them to Indian Rupee and shall make deposit in Indian Rupee.
For receipt of US$ 50,000 in 3 months (@ 1.5% interest) amount required
to be borrowed now (US$ 50,000 ÷ 1.015) = US$ 49,261.08
With spot rate of 72.65 the Rupee deposit will be = ` 35,78,817.46
Deposit amount will increase over 3 months (@2.25% interest) will be
= ` 36,59,340.85
Forward market hedge
Sell 3 months' forward contract accordingly, amount receivable after 3
months will be (US$ 50,000  72.95)
= ` 36,47,500
In this case, more will be received under the money market hedge hence it
is better option.
(ii) Exchange Exposure to H Ltd.
Expected Realisation as per Forward Rate ` 36,47,500
(US$ 50,000 72.95)
Actual Realisation as per actual Spot Rate ` 36,50,000
(US$ 50,000  73.00)
Gain ` 2,500

CA – FINAL
Video 144
Q.98. (a) No, while Citi Bank‟s quote is a Direct Quote for JPY (i.e. for Japan) the
Hong Kong Bank quote is a Direct Quote for USD (i.e. for USA).
(b) Since Citi Bank quote imply USD/ JPY 0.0094 - 0.0095 and both rates
exceed those offered by Hong Kong Bank, there is an arbitrage
opportunity.
Alternatively, it can also be said that Hong Kong Bank quote imply JPY/
USD 107.53 – 111.11 and both rates exceed quote by Citi Bank, there is
an arbitrage opportunity.
(c) Let us how arbitrage profit can be made.
(i) Covert US$ 1,000 into JPY by buying from Hong JPY
Kong Bank 1,07,530
Sell these JPY to Citi Bank at JPY/ USD 106.50
and convert in US$ US$ 1009.67
Thus, arbitrage gain (US$ 1009.67 - US$ 1000.00) US$ 9.67
(ii) Covert JPY 1,00,000 into USD by buying from Citi
Bank at JPY/ USD 106.50 US$ 938.97
Sell these US$ to Hong Kong Bank at JPY/ USD JPY
107.53 and convert in US$ 100967.44
Thus, arbitrage gain (JPY 1,00,967.44 - JPY JPY 967.44
1,00,000)
Video 145
Q.99. (a) (i) calculate the cross rate for pounds in Yen terms
1 £ = ? ¥
US$1 = ¥ 107.31
£1 = US$ 1.26
¥ $ ¥
 
$ £ £
¥
= 107.31  1.26
£
£1 = ¥ 135.21

CA – FINAL
(iii) Calculate the cross rate for Australian Dollar in Yen terms
A$1 = ¥?
US$1 = ¥ 107.31
A$ 1 = US$ 0.70
¥ $ ¥
 
$ A$ A$
¥
= 107.31  0.70
A$
A$ 1 = ¥ 75.12
(iii) Calculate the cross rate for Pounds in Australian Dollar terms
£ 1 = A$ ?
A$1 = US$ 0.70
US $ 1 = A$ 1.4286
£1 = US$1.26
A$ $ A$
 
$ £ £
A$
= 1.4286  1.26 = 1.80
$
£1 = A$ 1.80
(b) (i) If you believe the spot exchange rate will be $ 1.32/£ in three
months, you should buy £ 1,000,000 forward for $1.30/£ and sell at
$ 1.32/£ 3 months hence.
Your expected profit will be:
£1,000,000  ($1.32 - $1.30)
= $20,000
(ii) If the spot exchange rate turns out to be $1.26/£ in three months,
your loss from the long position in Forward Market will be: -
£ 1,000,000  ($ 1.26 - $1.30)
= $ 40,000


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CA FINAL

[EXPLANATIONS AND SOLUTIONS]

8070 400 700 online.jkshahclasses.com

2. It helps us understand what is the value of one unit of a particular currency in

Q.1. (a) 1 $ = BP 0.62

Strategic Financial Management 1 Forex

Risk – Uncertainty caused by future

Currency Risk (or Transaction Risk) : Uncertainty caused by Exchange Rate

Risk Hedging Tools

1) Forward Cover 1) Currency Future

Strategic Financial Management 2 Forex

1. Every quote has two aspects – Product and Price

2. The quote is always of the product.

3. 1$ = ` 100, Product = 1 $, price = `100

Direct and Indirect Quotes

1$ = ` 100  Direct Quote for India

Strategic Financial Management 3 Forex

`1 = $ 0.01 DQ for USA / Indirect Quote for India

1 £ = ¥ 500  DQ for Japan, IDQ for UK

1 ZAR = ` 5.34 ZAR ` DQ 1` = ZAR 0.1873

1 ` = SEK 0.1623 ` SEK IDQ 1SEK = ` 6.164

1` = SAR 0.0737 ` SAR IDQ 1SAR = ` 13.5685

Strategic Financial Management 4 Forex

Q.3. Quote Product Price Quote Reciprocal Quote

1 £ = $ 1.43 £ $ IDQ 1$ = £ 0.6993

1 CHF = ¥ 87 CHF ¥ DQ 1¥ = CHF 0.0115

UAE CHF DQ 1CHF = UAED

1 MR = SGD 0.4173 MR SGD DQ 1SGD = MR 2.3964

Bank Buys 1$ @ ` 50 Bank SELLS 1$ @ `55

BID Rate of $ in terms Ask Rate (or offer Rate)

Spread = Ask Rate – Bid Rate

Q.5. 1 £ = ` 72.70 – 73.25

(b) Spread = Ask Rate – Bid Rate

(c) We want to buy £,

(d) We will sell £ , bank will buy £

IDQ for Bid and Ask

Q.7. 1` / SGD = 33.5 – 33.75 i.e. 1 SGD = ` 33.50 – 33.75

(b) We want to sell SGD,

(c) 1SGD = ` 33.5 / 33.75

(d) We want to sell ` .

Strategic Financial Management 8 Forex

Q.8. 1$ = ` 51.3625 – 51.3700

ABN Canara Bank

We want to buy `. Canara bank will thus sell `

Cross Currency Rates for Single Quote

Cross currency Rate is a rate created using two quotes.

Strategic Financial Management 9 Forex

 When you are creating the cross currency Equation 

Cross Currency for Two way quotes – Exporter

Example : An Indian Exporter sells goods worth AUD 1,00,000 to an Australian

Step 1 : Common currency = $

Step 2 : We want 1 AUD = ` __________ – __________

NOTE : IF WE WANT BID RATE OF PRODUCT IN LHS, THEN TAKE BID

Strategic Financial Management 11 Forex

 The relevant rate will be BR of AUD in terms of $

Cross Currency for Two way quotes – Importer

Example : An Indian Importer buys goods worth

Step 1 : Common currency is $

Step 2 : We want 1 AUD = ` __________ – __________

Strategic Financial Management 12 Forex

Strategic Financial Management 13 Forex

Q.10. 1 € = $ 1.33 – 1.36

Strategic Financial Management 14 Forex

Step 2 : We want 1 AUD = ` –

Step 2 : We want 1 AUD = ` –