Acropolis Institute of Management Studies and Research, Indore

BBA VI Semester (Finance): International Finance

(Practical Problems)

1. Calculate outright forward rates, Spread, and Percentage Premium and

Discount in the following quotes;

Spot 1-month 3-months 6-months

(FFr/US$) 5.2321/2340 25/20 40/32 20/26

Ans.

Spot 1-month 3-months 6-months

(FFr/US$) 5.2321/2340 25/20 40/32 20/26

Forward 5.2321 - 5.2321 - 5.2321 +

Rates .0025 = .0040 = .0020 =
5.2296 5.2281 5.2341
5.2321 - 5.2321 - 5.2321 +
.0020 .0032 .0026 =
=5.2301 =5.2289 5.2347

2. On 15 September ICICI Bank received a Mail Transfer from New York

for USD 5000 payable to customer. Its account with the corresponding
bank has credited with the amount of Mail Transfer in reimbursement.
Assuming USD/ Rs. are quoted as;
Spot USD 1 = Rs. 49.2500/ 2700
Spot/ October Rs. 2200/ 2300.
Calculate exchange rate and rupee amount payable to the customer keeping
in mind;
I) Exchange margin is .08 %.
II) Rupee equivalent should be nearest to whole rupee.

Ans.

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 Acropolis Institute of Management Studies and Research, Indore
BBA VI Semester (Finance): International Finance
(Practical Problems)

In the above case the exchange margin of .08 % shall be deducted from Spot
October Rate i. e. 49.2500 + 0.2200 =49.4700 and .08% of 49.4700 is .03957 so
the bank shall give a net sell rate of Rs. 49.4304 for purchase of Mail Transfer net
of Margins.

Amount Received $ 5000

Rupee Equivalent = (49.2500 + .2200) = 49.4700

Less: Exchange Margin .(08/ 100) x 49.47 = 0.03957 49.4302 Rs. 247,152.12

3. Following are the currency pairs given to you,

$ / € 1.4559/ 1.4561.
¥/ $ 81.87 / 81.89.
C$ / $ 0.9544/ 0.9546.
Kr / $ 6.8739/ 6.8741.
¥/ C$ 85.73 / 85.75.
What are the Triangular Arbitrage transactions?
Ans.
First of all calculate implied cross rates for ¥/ C$,
¥ = ¥ x C$ (No Sense)
C$ $ $ C$ 0.9544/0.9546
Now we will do; $
¥ = ¥ x $
$ = 1/ 0.9546
C$ $ C$
C$ Bid

¥ = 81.87 x 1
$ = 1/ 0.9544
C$ Bid 0.9546
C$ Ask
¥ = 85. 76

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 Acropolis Institute of Management Studies and Research, Indore
BBA VI Semester (Finance): International Finance
(Practical Problems)

C$ Bid
¥ = 81.89 x 1
C$ Ask 0.9544
¥ = 85.80
C$ Ask

Implied Rates Bid Ask

Implied Cross Rates 85.76 85.80

Cross Rates 85.73 85.75

Buy C$ @ 85.75 and Sell C$ @ 85.76 by making Arbitrage Profit of 0.01 Yen.

4. The current Bank interest rate of U.S. and India are 4.5 % and 8.5 %
respectively. The present spot market rate in U.S. $ is Rs. 45.36. What
will be the 12 months forward rate?

Ans. F= ? , So = 45.36, I h = 8.5 % , IF= 4.5 %.

F = 1+ I h

So 1 + IF

F = 1+ 0.085 = 47.096
So 1 + 0.045

5. The current Inflation rate of U.S. and India are 3 % and 8% respectively.
The present spot market rate in U.S. $ is Rs. 45.36. What will be the 12
months forward rate?
Ans. S1 = ? , So = 45.36, I h = 8% , IF= 3 %.

S1 = 1+ P h

So 1 + PF
S1 = 1+ 0.08 = 47.56

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 Acropolis Institute of Management Studies and Research, Indore
BBA VI Semester (Finance): International Finance
(Practical Problems)

So 1 + 0.03
6. Calculate the arbitrage possibilities, if Spot rate: Rs 42.0010 = $ 1
6 month forward rate: Rs 42.8020 = $ 1, Annualized interest rate on:
– 6 month rupee: 12 %.
– 6 month dollar: 8%.
Ans.
• The rule is that if the interest rate differential is greater than the premium
or discount, place the money in the currency that has a higher rate if
interest or vice –versa.
Given the above data:
• Negative interest rate differential= (12-8)= 4%
• Forward premium (annualized) = Forward rate-Spot rate * 100 * 12
Spot rate 6
= 42.8020 – 42.0010 * 100 * 12 = 3.8141 %
42.0010 6
• Negative interest rate differential> forward premia, therefore, there is a
possibility of arbitrage inflow in India.
• Suppose, investment = $1000 by taking a loan @ 8% in US. Invest in India
at spot rate of Rs 42.0010 @ 12 % for six months and cover the principal +
interest in the six month forward rate.
• Principal= $ 1000 = Rs 42001, Interest on investment for six months
= Rs 42,001 * 12/ 100* 6/12 = Rs 2520.06
• Amount at the end of six months = Interest + Principal
= Rs 42001+ 2520.06 = Rs 44,521.06
• Converting the above in dollars at the forward rate
= $ 44,521.06 / 42.8020 = $ 1,040.16
• The arbitrageur will have to pay at the end of six months
= $1,000+ ($1000* 8/100 *6 /12)
• Hence, the arbitrageur gains ($1040.16 -$1040) = $ 0.16 on borrowing
$1000 for six months.

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 Acropolis Institute of Management Studies and Research, Indore
BBA VI Semester (Finance): International Finance
(Practical Problems)

7. Observe the following:

– Rs/US $
– London Rs.: 42.5730--42.61
– Tokyo $: 42.6350 -- 42.6675
– Can make money out of it?
Ans.
• Buy at London market at 42.6100 and sell the same at Tokyo market for
Rs.42.6350.
• Suppose you buy from London for 100 million Rupees you can get 100
million /42.61=$2,346,866.932
• Sell $ 2,346,866.932 in Tokyo market at Rs. 42.6350 gives
Rs.100,058,671.16
• There is transaction costs involved.
• Note: selling price of one market should be higher than buying price of
another market.
8. Following are three quotes in three FOREX markets

‒ 1$=Rs.48.3011 in Mumbai
‒ 1pound=Rs.77.1125 in London
‒ 1Pound=$1.6231 in New York.
• Are there any arbitrage gains possible? Assume there are no
transaction costs and the arbitrageur has $1,000,000.
Ans.
• The cross rate between Mumbai and London with respect to $/pound
=77.1125/48.3011 =$1.5965/pound
• But in New York the price is quoted $1.6231
• There is an opportunity to earn by buying Indian rupee in Mumbai market
and convert them into pounds in London Market
• Then convert pounds into Dollors in New York market.
• Rs.48.3011X 1 million Dollar=Rs.48,301,100

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 Acropolis Institute of Management Studies and Research, Indore
BBA VI Semester (Finance): International Finance
(Practical Problems)

• Pounds=48,301,100/77.1125=626,371.8592
• Dollars=626,371.8592X1.6231 =$1,016,664.164.
The gain is = $16,664.164.
9. Determine arbitrage gain from the following data:

– Spot rate Rs.78.10/pound

– 3 month forward rate Rs.78.60/pound
– 3 month interest rates:
• Rupees: 5%; British pound :9%
• Assume Rs10 million borrowings or pound 200,000 as the case may be.
Ans.
• Since forward rate is higher than the spot rate pound is at a premium.
• Percentage premium = (78.60-78.10)X12X100/(78.10X3)=2.56%
• Interest rate differential =9%-5%=4%
• This helps to borrow from Indian market and invest today in pounds in the
spot market.
• Step 1.Borrow in UK and invest such pounds after converting them into
rupees in India
• Step 2.After three months re convert the rupees including the interest into
pounds at forward rate
• Step 3.Deduct the loan including interest from step –2
• If step-2 is more than step-3 there is a gain.

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 Acropolis Institute of Management Studies and Research, Indore
BBA VI Semester (Finance): International Finance
(Practical Problems)

10.Euro is quoted in Chennai Spot Rs. 58.05, 6 Months forward at Rs. 58.40.
Interest Rates in Chennai is 6% and in Frankfurt 5% p.a.

• Find if any Arbitrage opportunity is available. Calculate the Arbitrage

Profit with Rs. 100, 00,000.

Ans.

Principal 100,00,000 Euro 172,256.29

Interest 6% 300,000 Interest5% 4,306.63

Amount payable 103,00,000 Amount receivable 176,751.92

Rupee Realization of Euro 176,571.92 @ Rs. 58.40 103,11,800

Repayment of Rupee borrowing Rs. 103,00,000

Arbitrage Profit Rs. 11,800

11.A bank quotes following;

• Spot USD 1 = INR 47.5680/ 47.5780, 3 Months Swap Points 75/ 90

• Spot DEM 1 = USD 0.5550 / 0.5588, 3 Months Swap Points 15/ 12
Determine 3 Months forward quote INR/ DEM.
Ans.
Spot USD 1 = Rs. 47.5688 Rs. 47.5780

Add: Swap Points 00.0075 00.0090

3 Months Forward Rs. 47.5755 Rs. 47.5870

Spot DEM 1 = USD. 00.5550 USD. 00.5550

Less: Swap Points 00.0015 00.0012

3 Months Forward USD. 00.5535 USD. 00.5538

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 Acropolis Institute of Management Studies and Research, Indore
BBA VI Semester (Finance): International Finance
(Practical Problems)

• INR/ DEM = INR/ USD X USD/ DEM

Bid Bid Bid
• INR/ DEM = INR/ USD X USD/ DEM
Ask Ask Ask

• 47.5755 x 0.5540 = INR 26.3568 Bid.

• 47.5870 x 0.5573 = INR 26.5202 Ask.
12.X Ltd. is holding an Export Bill in USD 100,000 due in 60 days. There are
chances of fall in USD. Spot USD is INR 45.60. Forward Rate is expected
at INR 45.50. Companies Bankers are quoting INR 45.20/ USD for 60
days forward.
• Calculate;
– Premium / Discount on INR/ USD.
– Probable loss if agreed forward sale.
Ans.
• Premium / Discount = [(F – S)/ S x 360 / d ]x 100
• [{(45.20- 45.60)/ 45.60} x 360/60] x 100 = - 5.26 %
• USD is at 5.26 % Discount to INR.
• If forward sale is accepted, there is a loss of INR 0.30 per USD amounting
to INR 30,000.
13.An importer requests bank to issue a bill for EURO 100,000. Interbank
market spot rate is INR 24.95. Forward discount for 2 months is INR
0.20. Banks margin is 0.10% and 0.125% for TT and Bill Selling
respectively. Determine the amount to be paid by Importer.

Ans.
• TT Selling Rate:
• Spot Selling Rate + Exchange Margin
• = 24.95 + ( 24.95 x 0.10/ 100) = 24.975
• 2 Months forward selling rate is TT selling Rate – 2 Months Discount
• 24.975 – 0.20 = 24.775

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 Acropolis Institute of Management Studies and Research, Indore
BBA VI Semester (Finance): International Finance
(Practical Problems)

• Bill Selling Rate:

• Spot Selling Rate + Exchange Margin
• = 24.775 x ( 24.775 x 0.125/100) = 24.80
• The importer will pay INR 24.80 lakh. ( EURO 100,000 x INR 24.80)
14.Indian exporter presents a demand export bill for USD 100,000. The
transit period is 15 days.

• The interbank buying rate in spot market is INR 49.8/ USD.

• One month buying rate is at premium of INR 0.08/ USD. Exchange margin
is 0.125%, Calculate the amount the exporter should receive.
Ans.
• The applicable rate = 49.80 – 0.125 % of 49.80 = 49.74.
• The exporter will receive: USD 100,000 x 49.74 = 49, 74,000.
• As the bank will receive the Dollars after 15 days so the exporter will be
required to pay interest for 15 days on 49, 74,000.
• * As the forward time is less than a month so rate shall be 49.80.
15.Indian exporter presents a demand export bill for USD 100,000. The
transit period is 30 days.
• The interbank buying rate in spot market is INR 49.8/ USD.
• One month buying rate is at premium of INR 0.08/ USD. Exchange margin
is 0.125%, Calculate the amount the exporter should receive.
Ans.
• The applicable rate = (49.80 + 0.08) – 0.125 % of 49.88 = 49.81.
• The exporter will receive: USD 100,000 x 49.81 = 49, 81,000.
• As the bank will receive the Dollars after 15 days so the exporter will be
required to pay interest for 15 days on 49, 74,000.
16.A Ltd. has borrowed USD 20 Lakh for 6 months. Interest payable on
maturity is LIBOR + 100 bp. Current 6 months LIBOR is 2 %. Exchange
rates are as follows;
• Spot USD 1 = INR 48.5275.
• 6 Months Forward = INR 48.4575.

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 Acropolis Institute of Management Studies and Research, Indore
BBA VI Semester (Finance): International Finance
(Practical Problems)

• What is the position if forward cover is taken?

• What is your advice? Give with reasons.
Ans.
• Annual Interest to be paid = LIBOR + 100 basis point.
=2+1=3%
• * 100 bp is 1 %.
• Half yearly interest rates is 1.5 %.
• Total amount payable is USD 20,00,000 + (20,00,000 x 1.5/100)
= 20, 30,000 USD.
• Forward Rate is 48.4575/ USD.
• Total commitment if forward cover taken;
• USD 20, 30,000 x 48.4575 = INR 9, 83, 68,725.
• Forward cover is advisable as USD is usually stronger than INR.
• Company can avoid forward cover only when it has a reason to believe that
the USD is going to be weak.
17.Suppose the spot ask rate, ($|£), is $2.10 = £1.00 and the spot bid rate,
($|£), is $2.07 = £1.00.

• If you were to buy $5,000,000 worth of British pounds and then sell
them five minutes later without the bid or ask changing, how much of
your $5,000,000 would be "eaten" by the bid-ask spread?
Ans.
• Convert dollars to pounds:
• ($5,000,000)/(2.10) = £2,380,952.38
• Convert pounds back to dollars:
• £2,380,952.38 X 2.07 = $4,928,571.43
• Loss due to bid-ask spread:
• $5,000,000 - $4,928,571.43 = 71,428.57
18.The dollar-euro exchange rate is $1.5968 = €1.00 and the dollar-yen
exchange rate is ¥108.0030 = $1.00.

• What is the euro-yen (€/¥) cross rate?

Ans.
• €/¥ = (€ /$) X ($/¥)
• €/¥ = (1/(1.5968)) X (1/(108.0030)) = 0.005798.

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 Acropolis Institute of Management Studies and Research, Indore
BBA VI Semester (Finance): International Finance
(Practical Problems)

19.The dollar-euro exchange rate is $1.5451 = €1.00 and the dollar-pound

exchange rate is $2.0975 = £1.00.

• What is the euro-pound (€/£) cross rate?

Ans.
• €/£ = (€/$) X ($/£)
• €/£ = (1/(1.5451)) X (2.0975) = 1.357517
20.The Dollar to Euro spot exchange rate is $1.4909/€1.00, the Dollar to Yen
spot exchange rate is $0.009346/¥1.00, and the Euro to Yen spot exchange
rate is €0.006501/¥1.00.
• Determine the triangular arbitrage profit that is possible if you have
$8,000,000.
Ans.
• Calculate the implied cross rate:
• €/¥ = (€ /$) X ($/¥)
• €/¥ = (1/(1.4909)) X 0.009346 = 0.006269
• Note that the implied €/¥ cross rate is smaller than the actual exchange
rate. This means that yen are more costly (in terms of Euros) using the
actual exchange rate.
• This indicates we should buy yen using dollars and exchange them into
Euros at the actual exchange rate.
• (Note: If you purchase the wrong currency first, you will end up with a loss
that is equal to the gain you get if you go in the other direction.).
• Trade dollars for yen:
• $8,000,000 x (1/(0.009346)) = ¥855,981,168.41
• Trade yen for Euros (using actual exchange rate):
• ¥855,981,168.41 X (0.006501) = €5,564,733.58
• Trade Euros for dollars:
• €5,564,733.58 X 1.4909 = $8,296,461.29
• Profit = $8,296,461.29 - $8,000,000 = $296,461.29

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 Acropolis Institute of Management Studies and Research, Indore
BBA VI Semester (Finance): International Finance
(Practical Problems)

21.The dollar-Swiss Franc exchange rate is $0.8922 = SF1.00 and the dollar-
Australian Dollar exchange rate is $0.7620 = AUD1.00. What is the Swiss
Franc to Australian Dollar (SF/AUD) cross rate?
Ans.
• SF/AUD = (SF/$) X ($/AUD)
• SF/AUD = (1/(0.8922)) X (0.7620) = 0.854069
22.The Dollar to Swiss Franc spot exchange rate is $0.8918/SF1.00, the
Dollar to Pound spot exchange rate is $1.6302/£1.00, and the SF to Pound
spot exchange rate is SF1.7914/£1.00.
• Determine the triangular arbitrage profit that is possible if you have
$8,000,000.
Ans. Calculate the implied cross rate:
• SF/£ = (SF /$) X ($/£)
• SF/£ = (1/(0.8918)) X 1.6302 = 1.827988
• Note that the implied SF/£ cross rate is larger than the actual exchange
rate. This means that pounds are less costly (in terms of SF) using the
actual exchange rate.
• This indicates we should buy SF using dollars and exchange them into
pounds at the actual exchange rate. (Note: If you purchase the wrong
currency first, you will end up with a loss that is equal to the gain you get
if you go in the other direction.)
• Trade dollars for SF:
• $8,000,000 x (1/(0.8918)) = SF8,970,621.22
• Trade SF for pounds (using actual exchange rate):
• (SF8,970,621.22)/(1.7914) = £5,007,603.67
• Trade pounds for dollars:
• £5,007,603.67 X 1.6302 = $8,163,395.50
• Profit = $8,163,395.50 - $8,000,000 = $163,395.50

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 Acropolis Institute of Management Studies and Research, Indore
BBA VI Semester (Finance): International Finance
(Practical Problems)

23.The current spot exchange rate is $2.0507/£ and the three-month forward
rate is $2.0753/£. You enter into a short position on £120,000.
• At maturity, the spot exchange rate is $2.0919/£. How much have you
made or lost?
Ans.
• You are short, so you must sell at the forward price.
• At maturity, you buy pounds at the spot rate:
• £120,000 X $2.0919 = $251,028
• You sell the pounds at the forward rate:
• £120,000 X $2.0753 = $249,036
• Your profit or loss is the sale value minus the cost: $249,036 - $251,028 =
loss of $1,992
24.The current spot exchange rate is $2.0507/£ and the three-month forward
rate is $2.0753/£. You enter into a long position on £120,000.
• At maturity, the spot exchange rate is $2.0919/£. How much have you
made or lost?
Ans.
• You are long, so you must buy at the forward price.
• At maturity, you buy pounds at the forward rate:
• £120,000 X $2.0753 = $249,036
• You sell the pounds at the spot rate:
• £120,000 X $2.0919 = $251,028
• Your profit or loss is the sale value minus the cost: $251,028 - $249,036 =
gain of $1,992.
25.The current spot exchange rate is $1.7261/£ and the three-month forward
rate is $1.7779/£. You enter into a short position on £130,000.
• At maturity, the spot exchange rate is $1.7672/£. How much have you
made or lost?

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 Acropolis Institute of Management Studies and Research, Indore
BBA VI Semester (Finance): International Finance
(Practical Problems)

Ans.
• You are short, so you must sell at the forward price.
• At maturity, you buy pounds at the spot rate:
• £130,000 X $1.7672 = $229,736
• You sell the pounds at the forward rate:
• £120,000 X $1.7779 = $231,127
• Your profit or loss is the sale value minus the cost: $231,127 - $229,736 =
gain of $1,391
26.The current spot exchange rate is $1.7261/£ and the three-month forward
rate is $1.7779/£. You enter into a long position on £130,000.

• At maturity, the spot exchange rate is $1.7672/£. How much have you
made or lost?
Ans.
• You are long, so you must buy at the forward price.
• At maturity, you buy pounds at the forward rate:
• £120,000 X $1.7779 = $231,127
• You sell the pounds at the spot rate:
• £130,000 X $1.7672 = $229,736
• Your profit or loss is the sale value minus the cost: $229,736 - $231,127 =
loss of $1,391
27.Suppose that the one‐year interest rate is 5.32% in the United States, the s
pot exchange rate is $1.5694/€1.00, and the one‐year forward exchange ra
te is $1.5313/€1.00.

• Based on interest rate parity, what must the one‐year interest rate be i
n the euro zone?
Ans.
• F = S((1+i$)/(1+i€)
• 1.5313 = 1.5694((1+0.0532)/(1+i€)
• 1.5313(1+i€) = (1.5694)(1+0.0532)
• (1+i€) = [(1.5694)(1.0532)/(1.5313)
• i€ = [(1.5694)(1.0532)/(1.5313)] 1
• = 0.0794 = 7.940%

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 Acropolis Institute of Management Studies and Research, Indore
BBA VI Semester (Finance): International Finance
(Practical Problems)

28.Suppose that the one‐year interest rate is 4.53% in Italy, the spot exchang
e rate is $1.5296/€1.00, and the one‐year forward exchange rate is $1.5570
/€1.00.
• Based on interest rate parity, what must the one‐year interest rate be i
n the United States?
Ans.
• F = S((1+i$)/(1+i€)
• 1.5570 = 1.5296((1+i$)/(1+0.0453))
• i$ = [(1.0453)(1.5570)]/(1.5296) 1 = 0.06402 = 6.402%.
29.A currency dealer has good credit and can borrow $870,000 (or the equiv
alent in euros) for one year.
• The interest rate in the U.S. is 3.30% p.a.
• In the euro zone the one‐year interest rate is 8%.
• The spot exchange rate is $1.4601 = €1.00 and the one‐year forward excha
nge rate is $1.3811 = €1.00.
What arbitrage profit would be realized if the trader borrows the maximum availa
ble amount of funds?
Ans.
• Borrow Euros and convert to dollars: €595,849.60 X 1.4601 = $870,000
• Invest $ @ 3.3%: $870,000 X (1 + 0.033) = $898,710
• Convert enough dollars to Euros to pay loan:
• Loan payoff = €595,849.60 X (1 + 0.08) = €643,517.57 which equals
€643,517.57 X (1.3811) = $888,762.12
• Profit in $ = $898,710 ‐ $888,762.12 = $9,947.88
• OR:
• Convert all dollars to Euros: ($898,710)/(1.3811) = €650,720.44
• Profit in $ = €650,720.44 ‐ €643,517.57
• = €7,202.87

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 Acropolis Institute of Management Studies and Research, Indore
BBA VI Semester (Finance): International Finance
(Practical Problems)

30.A currency dealer has good credit and can borrow $1,350,000 (or the equi
valent in euros) for one year.
• The interest rate in the U.S. is 8.00% and in the euro zone the one‐year
interest rate is 4.30%.
• The spot exchange rate is $1.4827 = €1.00 and the one‐year forward ex
change rate is $1.5573 = €1.00.
What arbitrage profit would be realized if the trader borrows the maximum
available amount of funds?
Ans.
• Borrow dollars and convert to Euros ($1,350,000/1.4827) = €910,501.11
• Invest € @ 4.3%: €910,501.11 X (1 + 0.043) = €949,652.66
• Convert enough Euros to dollars to pay loan:
• Loan payoff = $1,350,000 X (1 + 0.08)
• = $1,458,000 OR ($1,458,000)/(1.5573) = €936,235.79
• Profit in € = €949,652.66 ‐ €936,235.79 = €13,416.87
OR:
• Convert all Euros to dollar: (€949,652.66)(1.5573) = $1,478,894.09
• Profit in $ = $1,478,894.09 ‐ $1,458,000 = $20,894.09

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