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ST. JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)
END SEMESTER EXAMINATION – OCTOBER 2013
MIB – III SEMESTER
FOREIGN EXCHANGE MANAGEMENT
Time: 3 Hours Max. Marks: 100
SECTION- A
I) Answer any SEVEN questions. (7×5 = 35)
1. Assume that the Polish currency (called zloty) is worth USD 0.32. The
USD is worth EUR 0.7. One USD can be exchanged for 8 Mexican pesos.
Last year a dollar was valued at 2.9 Polish zloty and the peso was valued
at USD 0.10.
(a) Would US exporters to Mexico that expect pesos as payment be
favourably or unfavourably affected by the change in the Mexican
peso’s value over the last year?
(b) Would US importers from Poland that pay for imports in zloty be
favourably or unfavourably affected by the change in the zloty’s
value over the last year?
2. State the covered interest parity theorem. Assume that interest rate parity
exists. The one-year nominal interest rate in the US is 7%, while the one
year nominal interest rate in Australia is 11%. The spot rate of the
Australian dollar is USD 0.60. Today, you purchase a one year forward
contract on 10M AUD. How many USD will you need in one year to
fulfill your forward contract?
3. Global Banking Corp. can borrow $5 M at 5% annualized. It can use the
proceeds to invest in Canadian dollars at 9% annualized over a 6-day
period. The Canadian dollar is worth $ 0.95 and is expected to be worth $
0.94 in 6 days. Based on this information, should Global Banking Corp.
borrow US dollars and invest in Canadian Dollars? What would be the
gain or loss in US dollars?
4. What are the quotation conventions adopted by ACI?
5. What is Fundamental Forecasting based on?
6. A valued constituent of a bank wants to remit FFR 200,000. The spot
interbank levels are:
USD/INR 43.3550/3650
USD/FFR 5.9028/48
Calculate the rupee amount to be recovered from the customer taking into
account, Exchange margin of 0.10%
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7. A bank issued a demand draft on Montreal for CAD 50,000 at CAD/INR
29.4850. However, after a few days the purchaser of the draft requested
the bank to cancel it and repay the rupee equivalent to him.
Assuming the CAD were quoted in the Singapore market as under:
USD/ CAD 1.4541/4561
And in the interbank market USD/INR 42.5275/5350, how much will the
customer gain/lose on cancellation of the draft? Exchange margin on TT
buying is 0.08%
8. What does the BOP approach state as a theory of exchange rate
determination?
9. Distinguish between forward contracts and futures contract.
10. Give a summary of option pay off patterns.
SECTION -B
II) Answer any THREE questions. (3×15=45)
11. (a) On 20th May a bank’s customer tenders a 30 days sight bill drawn
under a letter of credit, in his favour opened by the bank’s Singapore
branch. The bill is for Singapore dollars 100,000 drawn on Hongkong. The
customer desires to retain 25% of the proceeds of the bill in foreign
exchange.
Assuming SGD are quoted in Singapore market as under:
Spot USD/SGD 1.6210/6240
1 month forward 42/40
2 months forward 63/60
3 months forward 84/80
USD are quoted in the interbank market as under:
Spot USD/INR
43.4525/4600
Spot June 1100/1000
Spot July 2200/2100
3 August 3300/3200
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What rate will the bank quote to the customer?
The bank requires an exchange margin of 0.10%, Transit period is 20
days. Interest on post shipment finance is 10%.
Also calculate the rupee amount payable to the customer.
(8 marks)
b) Euro is quoted in Singapore as under:
Spot EUR/USD 1.0125/150
One month forward 0.0050/0.0075
In the interbank market, USD is quoted as follows:
Spot USD/INR 42.1250/1375
1 month forward 6000/6100
The bank loads an exchange margin of 0.15% in the exchange rate for
TT selling and 0.20% for bill selling.
i) A shipping company has asked the bank to quote its TT selling
rate for a freight remittance of EUR 150,000 to Frankfurt
ii) Another customer requires the bank to retire an import bill
drawn on him for Euro 12,000
What rate will the bank quote to the customers?
(7 marks)
12. Explain covered interest parity theory.
13. Explain the corporate motives for forecasting exchange rates. Explain
technical and fundamental forecasting methods. What are some
limitations of using the fundamental technique to forecast exchange rates?
14. (a) On 27th December 2008, Gitanjali Jewellers required State Bank of
India to remit FFR 300,000 to France in payment of import of diamonds
under an irrevocable LC. However due to the bank’s strike, State Bank of
India could remit only on 4th January 2009. Interbank rates were as
follows:
PLACE 27th December 2008 4th January 2009
Delhi
(INR/USD)
USD per INR 100
4.10/4.15 4.07/4.12
London
(GBP/USD)
2.7250/60 2.7175/85
Paris
(GBP/FFR)
4.9575/90 4.9380/ 90
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State Bank of India wishes to retain an exchange margin of 0.125%. How
much does Gitanjali Jewellers stand to gain or lose due to the delay?
(8 marks)
(b) Today is April 3rd. Spot USD/INR:48.75/78
Spot April end: 5/8
Spot May end: 12/17
Spot June end: 20/30.
Find the quote on June 20th.
(7 marks)
15. Write a note on Purchasing Power Parity theory and International Fischer
Effect.
SECTION –C
III) Compulsory – Case Study (20 marks)
How BMV dealt with Foreign Exchange Risk
The story: BMW Group, owner of the BMW, Mini and Rolls-Royce brands, has been
based in Munich since its founding in 1916. But by 2011, only 17 per cent of the cars
it sold were bought in Germany.
In recent years, China has become BMW’s fastest-growing market, accounting for 14
per cent of BMW’s global sales volume in 2011. India, Russia and eastern Europe
have also become key markets.
The challenge: Despite rising sales revenues, BMW was conscious that its profits
were often severely eroded by changes in exchange rates. The company’s own
calculations in its annual reports suggest that the negative effect of exchange rates
totalled €2.4bn between 2005 and 2009.
BMW did not want to pass on its exchange rate costs to consumers through price
increases. Its rival Porsche had done this at the end of the 1980s in the US and sales
had plunged.
In the light of the above case study explain what foreign exchange rate risks it might
be facing and methods to manage the same.
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