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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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Foreign Exchange Management
St. Joseph’s College of Commerce M.Com. 2014 III Sem Foreign Exchange Management Question Paper PDF Download
- JOSEPH’S COLLEGE OF COMMERCE (AUTONOMOUS)
End Semester Examinations – OCTOBER 2014
MIB –III semester
FOREIGN EXCHANGE MANAGEMENT
Duration: 3 Hrs Max. Marks: 100
SECTION – A
- Answer any SEVEN Each carries 5 marks. (7 x 5 = 35)
- What are the features of a foreign exchange market?
- Write a note on Foreign Exchange Dealers Association of India (FEDAI).
- Explain BOP theory of exchange rate determination.
- Briefly explain the various techniques of forecasting.
- Suppose that the current spot exchange rate is €0.80/$ and the three-month forward exchange rate is €0.7813/$. The three-month interest rate is 5.6 percent per annum in the United States and 5.40 percent per annum in France. Assume that you can borrow up to $1,000,000 or €800,000.
- Show how to realize a certain profit via covered interest arbitrage, assuming that you want to realize profit in terms of U.S. dollars. Also determine the size of your arbitrage profit.
- Assume that you want to realize profit in terms of Euros. Show the covered arbitrage process and determine the arbitrage profit in Euros.
- Assume that locational arbitrage ensures that spot exchange rates are properly aligned. Also assume that you believe in purchasing power parity. The spot rate of the British pound is $1.80. The spot rate of the Swiss franc is 0.3 pounds. You expect that the one-year inflation rate is 7 percent in the U.K., 5 percent in Switzerland, and 1 percent in the U.S. The one-year interest rate is 6% in the U.K., 2% in Switzerland, and 4% in the U.S. What is your expected spot rate of the Swiss franc in one year with respect to the U.S. dollar? Show your work.
- Explain the different forms of Natural hedges or Internal hedging strategies
- An Indian importer imports goods worth $62,500. He expects an appreciation of pound. So he goes for hedging the risk. The currency market has the following data:
(a) Spot rate on the date of the contract Rs. 68,00/£
(b) Three month forward rate Rs. 68.50/£
(c) Strike rate in a three-month call option Rs. 68.60/£ with 5% premium
(d) Strike rate in a three-month put option Rs. 68.80/£ with 5% premium
(e) Spot rate on the date of payment/maturity Rs. 68.90/£
Will he go for a hedge? If so, which of the options he will select?
- Write a note on interest rate caps and floors.
- Briefly explain currency swaps.
Section – B
- Answer any THREE questions. Each carries 15 marks. (3 x 15 = 45)
- You plan to visit Geneva, Switzerland in three months to attend an international business conference. You expect to incur the total cost of SF 5,000 for lodging, meals and transportation during your stay. As of today, the spot exchange rate is $0.60/SF and the three-month forward rate is $0.63/SF. You can buy the three-month call option on SF with the exercise rate of $0.64/SF for the premium of $0.05 per SF. Assume that your expected future spot exchange rate is the same as the forward rate. The three-month interest rate is 6 percent per annum in the United States and 4 percent per annum in Switzerland.
(a) Calculate your expected dollar cost of buying SF 5,000 if you choose to hedge via call option on SF.
(b) Calculate the future dollar cost of meeting this SF obligation if you decide to hedge using a forward contract.
(c) At what future spot exchange rate will you be indifferent between the forward and option market hedges?
(d) Illustrate the future dollar costs of meeting the SF payable against the future spot exchange rate under both the options and forward market hedges.
- Write a note on the following: Each carries 5 marks
- Interest rate collars
- Interest rate corridors
- Forward rate agreements (FRA’s)
- A) Explain the trading Process, Pricing and credit risk involved in currency futures market (7 Marks)
- B) Explain the broad features of currency options market and also elucidate on the various types of options and hedging in currency options market. (8 Marks)
- The one-year risk-free interest rate in Mexico is 10%. The one-year risk-free rate in the U.S. is 2%. Assume that interest rate parity exists. The spot rate of the Mexican peso is $.14.
- What is the forward rate premium?
- What is the one-year forward rate of the peso?
- Based on the international Fisher effect, what is the expected change in the spot rate over the next year?
- If the spot rate changes as expected according to the IFE, what will be the spot rate in one year?
- Compare your answers to (b) and (d) and explain the relationship.
- Boston Co. will receive 1 million Euros in one year from selling exports. It did not hedge this future transaction. Boston believes that the future value of the euro will be determined by purchasing power parity (PPP). It expects that inflation in countries using the euro will be 12% next year, while inflation in the U.S. will be 7% next year. Today the spot rate of the euro is $1.46, and the one-year forward rate is $1.50.
- Estimate the amount of U.S. dollars that Boston will receive in one year when converting its euro receivables into U.S. dollars.
- Today, the spot rate of the Hong Kong dollar is pegged at $.13. Boston believes that the Hong Kong dollar will remain pegged to the dollar for the next year. If Boston Co. decides to convert its 1 million Euros into Hong Kong dollars instead of U.S. dollars at the end of one year, estimate the amount of Hong Kong dollars that Boston will receive in one year when converting its euro receivables into Hong Kong dollars.
Section – C
- Compulsory Case study. (1 x 20 = 20)
16.
- A Bank’s customer requests the bank to purchase a 30 days sight bill for Swiss Franc 5,00,000. USD/INR is quoted in the interbank market as follows:
USD/INR Spot – 42.2800/2875
1 Month – 1700/1750
2 Month – 3500/3550
3 Month – 5500/5550
The Swiss Franc is quoted in the Singapore market as follows:
USD/CHF Spot – 1.4250/4375
1 Month – 50/55
2 Month – 105/110
3 Month – 155/160
What rate will the bank quote to the customer given the following additional information?
- Exchange margin 0.10%
- Transit period is 20 Days
- Rate of interest is 10% p.a.
- Commission on export bill Rs. 500
What is the Rupee amount payable to the customer? (15 MARKS)
- b) If a bank in India gives a quotation for USD as follows TT rates for INR 100 is USD 12.65/12.75. What amount in Rupees will the bank recover from the customer to remit USD 25,000 to New York? (5 MARKS)