Forex

Sanjay Sir Speaks

Gone are the days when SFM used to be a mix
of plain vanilla topics like Capital
Budgeting (Old machine vs New
machine), Leasing and theory. During
that era, any person with a
Accounts and Cost background
could have successfully
taught SFM. There has been
a radical shift in SFM
towards exotic topics like
Risk Management,
Derivatives, Foreign
Exchange, Portfolio Management, etc. Even in this term i.e. Nov13,
we had around 22 marks from FOREX alone. Results therefore have
been pathetic even in metro cities like Delhi and Mumbai. This is an
era of specialization. Perfection over this subject now requires
guidance from someone equipped in Statistics, Economics and
ofcourse, hard core Finance. This book and the accompanying
Youtube videos are an earnest attempt to expose you to the efficient
style of SFM teaching.

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SSForex-1

SSForex-1 Part I
youtu.be/J_SPcPLlykA

SSForex-1 Part II
youtu.be/xg0ptUZ4wnA
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SSForex-4 Part I
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SSForex-4 Part III

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Sanjay Saraf Educational Institute Private Limited

Page # 25 Question No. 6

1.

You sold Hong Kong Dollar 1,00,00,000 value spot to your customer at `
5.70 and covered yourself in London market on the same day, when the
exchange rates were
US$ 1

H.K.$

73880

7.5920

42.70

42.85

Local inter bank market rates for US$ were

Spot USS 1

Calculate cover rate and ascertain the profit or loss in the transaction
ignore brokerage.
HINTS
Cover rate = 5.8 per HK$, Loss = ` 1000000

Page # 24 Question No. 4

2.

On January 28, 2005 an importer customer requested a bank to remit

Singapore Dollar (SGD) 25,00,000 under an irrevocable LC. However
due to bank strikes, the bank could effect the remittance only on February
4, 2005. The inter bank market rates were as follow :
January 28
Bombay

US$1

` 45.85/45.90

February 4
45.91/45.97

London

Pound I

US$17840/17850

1.7765/1.7775

Pound I

SGD3.1575/3.1590 3.1380/3.1390

The bank wishes to retain an exchange margin of 0.125%.

How much does the customer stand to gain or lose due to the delay ?
(Calculate rate in multiples of .000 1)
HINTS
Loss = ` 228250

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Page # 30 Question No. 19

3.

The following 2-way quotes appear in the foreign exchange market :

RS/US $

Spot

2-months forward

`46.00/`46.25

`47.00/`47.50

Required :
(i) How many US dollars should a firm sell to get `25 lakhs after 2
months?
(ii) How many Rupees is the firm required to pay to obtain US $
2,00,000 in the spot market?
(iii) Assume the firm has US $ 69,000 in current account earning no interest. ROI on Rupee investment is 10% p.a. Should the firm encash
the US $ now or 2 months later?
HINTS
(i) $ 53191.49 (ii) ` 9250000 (iii) inflow US $ Now = ` 3226900, 2 months later
= ` 3243000 (Better)

Page # 28 Question No. 13

4.

A company is considering hedging its foreign exchange risk. It has made

a purchase on 1st January, 2008 for which it has to make a payment of US
$ 50,000 on September 30, 2008. The present exchange rate is 1 US $ = `
40. It can purchase forward 1 US $ at ` 39. The company will have to make
a upfront premium of 2% of the forward amount purchased. The cost of
funds to the company is 10% per annum and the rate of Corporate tax is
50%. Ignore taxation. Consider the following situations and compute the
Profit/Loss the company will make if it hedges its foreign exchange risk :
(i) If the exchange rate on September 30, 2008 is ` 42 per US $.
(ii) If the exchange rate on September 30, 2008 is ` 38 Per US $.
HINTS
Profit = ` 108075, Loss = ` 91925

Page # 19 Question No. 22

5.

On 1st March, 2008, A Inc, a US company bought certain products from

Tapland. The currency of Tapland is Tapa. The price agreed was Tapa

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900000 payable on 31st May, 2008.

The spot price on 1st March, 2008 was 10 Tapa per US $. The expected
future spot rate was 8 Tapa per US $; and the 3-months forward rate is 9
Tapa per US$. The US and Tapland annual interest rate are 12% and 8%
respectively. The tax rate for both countries is 40%. A Inc., is considering
three alternatives to deal with the risk of exchange rate fluctuations.
(a) To enter the forward market to buy Tapa 9,00,000 at 3 months forward rate.
(b) To borrow appropriate amount in $ to buy Tapa at current spot rate
and to invest the Tapa purchased for 3 months.
(c) To wait untill May 31, 2008, and buy Tapas at whatever spot rate
prevailing at that time.
Which alternative the A Inc. should follow in order to minimize its cost
of future payment of Tapas.
HINTS
(a) O/F = $ 1,00,000 (b) O/F = $ 90533.60 (c) $ 112500
Option (b) should be chosen

Page # 19 Question No. 23

6.

At the end of August, 2008, an Indian company, an exporter has an export

exposure of 5,00,000 H.K.$ due at the end of September, 2008. HK $ is not
directly quoted against India rupee. The current spot rates are INR/USD
= ` 46 and HK$/USD = HK$2.3. It is estimated that HK$ will depreciate
to HK $2.5 level and Indian Rupee to depreciate against US$ to ` 47. One
month forward rate at the end of August are HK$/USD = HK$ 2.45 and
INR/USD = ` 47.04.
(i) Calculate expected loss if hedging is not done. How the position
will change with the company taking a forward cover?
(ii) If spot rate on 30the September, 2008 are eventually HK$/USD =
HK$ 2.52 and INR/USD = 47.88 is the decision to take forward
cover justified.
HINTS
(i) ` 4,00,000 - Under realization (ii) Spot rate = ` 19 / HK $, so forward cover
justified

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Page # 17 Question No. 19

7.

Arnie operating a garment store in US has imported garments from

Indian exporter of invoice amount of ` 1,38,00,000 (equivalent to US$
3,00,000). The amount is payable in 3 months. It is expected that the
exchange rate will decline by 5% over 3 months period. Arnie is interested
to take appropriate action in foreign exchange market. The three month
forward rate is quoted at ` 44.50.
You are required to calculate expected loss which Arnie would suffer due
to this decline if risk is not hedged. If there is loss, then how he can hedge
this risk.
HINTS
Expected Loss (without hedge) = $ 15789.47
Savings due forward cover = $ 5677.11

Page # 8 Question No. 13

8.

Given 3mf $1.2625/EURO

Annualized forward rate discount on EURO based on this 3mf rate is 6%.
Find out the spot rate.
HINTS
Spot Rate (S) = 1.2817
S = $ 1.2817/

Page # 8 Question No. 14

9.

Given 3mf $1.0450/EURO

Annualized forward rate discount on $ against EURO based on this 3mf
rate is 6%. Also annualized forward rate discount on EURO against $
based on this 6mf rate is 8%. Find out 6mf.
HINTS
6 month Forward Rate = 8%
$ 0.9881

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Page # 8 Question No. 12

10.

Given : Spot Rate

`48/$
3mf ` 48.6/$
Calculate annualized forward premium on $ & on `
HINTS
Annualised Forward Premium On $ = 5%,Annualised Forward Premium on `
= 4.94%
AP on $ = 5%, AP on ` = 4.94% (discount)

Page # 17 Question No. 18

11. An automobile company in Gujarat exports its goods to Singapore at a
price of SG$ 500 per unit. The company also imports components from
Italy and the cost of components for each unit is 200. The companys
CEO executed an agreement for the supply of 20000 units on January
01, 2010 and on the same date paid for the imported components. The
companys variable cost of producing per unit is ` 1,250 and the allocable
fixed costs of the company are ` 1,00,00,000.
The exchange rates as on 1 January 2010 were as follows Spot
`/SG$ 33.00/33.04

`/ 56.49/56.56
Mr. A, the treasury manager of company is observing the movements
of exchange rates on a day to day basis and has expected that the rupee
would appreciate against SG$ and would depreciate against i.
As per his estimates the following are expected rates for 30th June 2010.
Spot
`/SG$ 32.15/32.21

`/ 57.27/57.32
You are required to find out :
(a) The change in profitability due to transaction exposure for the contract entered into.
(b) How many units should the company increases its sales in order to
maintain the current profit level for the proposed contract in the
end of June 2010.
HINTS
(a) ` 115.4 lakhs (b) 23434 units
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Page # 29 Question No. 15

12.

Followings are the spot exchange rates quoted at three different forex
markets :
USD/INR

48.30 in Mumbai

GBP/INR

77.52 in London

GBP/USD

1.6231 in New York

The arbitrageur has USD 1,00,00,000. Assuming that there are no transaction costs, explain whether there is any arbitrage gain possible from the
quoted spot exchange rates.
HINTS
Loss = $ 111006

Page # 31 Question No. 21

13.

You have following quotes from Bank A and Bank B :

SPOT

Bank A
USD/CHF 1.4650/55

3 months

5/10

6 months

10/15

SPOT

GBP/USD 1.7645/60

3 months

25/20

6 months

35/25

Bank B
USD/CHF 1.4653/60

GBP/USD 1.7640/50

Calculate :
(i) How much minimum CHF amount you have to pay for 1 million
GBP spot?
(ii) Considering the quotes from Bank A only, for GBP/CHF what are
the Implied Swap points for Spot over 3 months?
HINTS
(i) CHF = 2.5866 million (ii) (28/12)

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Page # 30 Question No. 20

14.

Your forex dealer had entered into a cross currency deal and had sold US
$ 10,00,000 against EURO at US $ 1 = EUR 1.4400 for spot delivery.
However, later during the day, the market became volatile and the dealer
in compliance with his managements guidelines had to square up the
position when the quotations were :
Spot US $ 1
1 month margin

INR 31.4300/4500
25/20

2 months margin

45/35

Spot US $ 1

EURO 1.4400/4450

1 month forward

1.4425/4490

2 months forward

1.4460/4530

What will be the gain or loss in the transaction?

HINTS
Profit on squaring off = ` 274500

Page # 11 Question No. 4

15.

A company operating in USA has invoiced sales to an Indian company,

the payment being due three months from the date of invoice. The
invoice amount is $ 14,000 and at current spot rate of $ 0.0243 per Re.1.
It is anticipated that the exchange rate will decline by 4% over the three
months period and in order to protect the dollar proceeds, the importer
proposes to take appropriate action through foreign exchange market.
The three month forward rate is quoted as $ 0.0236 per ` 1.
You are required to calculate the expected loss and to show, how it can be
hedged by forward contract.
HINTS
Expected loss = ` 24726, outflow based on E(S) = ` 600858, Outflow based on
3MP = ` 593220
Savings = 7838 = 30.9%

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Page # 16 Question No. 17

16.

Somu Electronics imported goods from Japan on July 1st 2009, of JP

1 million, to be paid on 31st, December 2009. The treasury manager
collected the following exchange rates on July 01, 2009 from the bank.
Delhi `/US$ Spot 45.86 /88
6 months forward

46.00/03

Tokyo JP / US$ Spot

108/108.50

6 months forward

110/110.60

In spite of fact that the forward quotation for JP was available through
cross currency rates, Mr. X, the treasury manager purchased spot US$
and converted US$ into JP in Tokyo using 6 months forward rate.
However, on 31st December, 2009 `/US$ spot rate turned out to be
46.24/26.
You are required to
Calculate the loss or gain in the strategy adopted by Mr. X by comparing
the notional cash flow involved in the forward cover for Yen with the
actual cash flow of the transaction.
HINTS
` 2090 (Loss)

Page # 5 Question No. 4

17.

Consider the following table

Particulars
Spot Rate `/$
1m Swap Pts
2m Swap Pts
3m Swap Pts

1st July
45.30/45.50
40/50
70/80
100/110

1st August
45.40/60
60/50
80/70
100/90

1st September
45.75/95
90/110
130/150

CASE (I) : Customer on 1st July sold $ 20,000 2 month forward and
cancelled the contract on 1st September.
CASE (II) : On 1st August the bank entered into a forward sale contract of 2 months involving $5,00,000. On 1st September
the customer requests for extension by 1 month.
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CASE (III) : On 1st July a customer sold $3,00,000 3 month forward.

However, on 1st August he want to extend the contract by
1 month.
HINTS
Case 1 : Profit = ` 1,000 (exclusive fees of 100 as per FEDAI)
Case 2 : Profit = ` 875000
Case 3 : Profit on Cancellation = ` 420000

Page # 23 Question No. 3

18.

A customer with whom the Bank had entered into 3 months forward
purchase contract for Swiss Francs 1,00,000 at the rate of ` 36.25 comes
to the bank after two months and requests cancellation of the contract.
On this date, the rates are :
Spot
One month forward

CHF I = ` 36.30

36.35

36.45

36.52

Determine the amount of Profit or Loss to the customer due to cancellation of the contract.
HINTS
Loss = 27000 + FEDAI tec

Page # 13 Question No. 12

19.

On 30th June 2009 when a forward contract matured for execution you
are asked by an importer customer to extend the validity of the forward
sale contract for US$ 10,000 for a further period of three months.
Contracted Rate US$1 = `41.87
The US Dollar quoted on 30.6.2009
Spot

` 40.4800/` 40.4900

Premium July

0.1100/0.1300

Premium August

0.2300/0.2500

Premium September

0.3500/0.3750

Calculate the cost for your customer in respect of the extension of the
forward contract.
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Rupee values to be rounded off to the nearest Rupee.

Margin 0.080% for Buying Rate
Margin 0.25% for Selling Rate
HINTS
F14224, 409662

Page # 32 Question No. 25

20.

An importer requests his bank to extend the forward contract for US$
20,000 which is due for maturity on 30th October, 2010, for a further
period of 3 months. He agrees to pay the required margin money for such
extension of the contract.
Contracted Rate US$ 1 = 42.32
The US Dollar quoted on 30-10-2010.
Spot 41.5000/41.5200
3 months Premium - 0.87%, 0.93%
Margin money for buying and selling rate is 0.075% and 0.20% respectively.
Compute :
(i) The cost to the importer in respect of the extension of the forward
contract, and
(ii) The rate of new forward contract.
HINTS
(i) Loss = ` 17022 (ii) 3mf = 41.9899

Page # 24 Question No. 5

21.

You as a dealer in foreign exchange have the following position in Swiss

Francs on 31st October, 2004 :
Sw Fcs.
Balance in the Nostro A/c Credit

1,00,000

Opening Position Overbought

50,000

Purchased a bill on Zurich

80,000

Sold forward TT

60,000

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Forward purchase contract cancelled

30,000

Remitted by TT

75,000

Draft on Zurich cancelled

30,000

What steps would you take, if you are required to maintain a credit Balance of Sw.
Fcs. 30,000 in the Nostro A/c and keep as overbought position on Sw. Fcs.
10,000 ?
HINTS
Buy SF 5000 spot Position nIL. To achieve target Position buy SF 10000
forward

Page # 23 Question No. 2

22.

Excel Exporters are holding an Export bill in United States Dollar (USD)
1,00,000, due 60 days hence. They are worried about the falling USD
value which is currently at ` 45.60 per USD. The concerned Export
Consignment has been priced on an Exchange rate of
` 45.50 per USD. The Firms Bankers have quoted a 60- day forward rate
of ` 45.20.
Calculate :
(i) Rate of discount quoted by the Bank
(ii) The probable loss of operating profit if the forward sale is agreed to.
HINTS
(i) 5.43% (ii) Loss = 30000

Page # 23 Question No. 1

23.

The United States Dollar is selling in India at ` 45.50. If the interest rate for
a 6-month borrowing in India is 8% per annum and the corresponding
rate in USA is 2%,
(i) Do you expect United States Dollar to be at a premium or at discount in the Indian forward market;
(ii) what is the expected 6-month forward rate for United States Dollar
in India; and
(iii) what is the rate of forward premium or discount?

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HINTS
(i) at a premium (ii) ` 46.8515 / $ (iii) 5.9341%

Page # 22 Question No. 27

24.

The following table reflect interest rate for the US $ and french francs. The
spot exchange rate 7.05 francs per dollars. Complete the missing entries.
3 Months

6 Months

1 Year

11.5%

12.25%

19.5%

20%

7.5200

6.3%

Dollar interest rate

(effective rate)
Franc interest rate
(effective rate)
Forward rate franc per dollar
Forward discount on franc
percent per year
HINTS

Page # 6 Question No. 5

25.

Spot rate $ 1.6095/POUND

Interest rates (p.a. compounded continuously)
i$ = 8%

iPound = 3%
Find 3 m forward rate. (Use e0.025 = 1.027)
HINTS
F = $ 1.6297/

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Tool Kits
is time around, there is a complete revamp of our study materials or it would be better
to call it tool kit. It would comprise of 1.

QUESTION BANK
is is a compilation of exam representative unsolved
questions classi ed into 3 categories

Past papers

Revision Test Papers

From our desk

is is the book that students need to carry in class everyday.

2. SELF PRACTICE BOOK- is is a compilation of solved problems which the

student is expected to try and solve at his own end. It is a well known fact that
students get con dence only when they solve problems themselves on the basis of
concepts practiced in class. is book is meant to ful l this lacunae.
3. CASE STUDY, SECRET SAUCE, CHEAT SHEET, THEORY AND MIND
MAP - is book as the name suggests is our di erential marketing element. As per
the institutes prescribed curriculum, they are slowly but steadily moving towards
practical based real life case study designed papers to test students ability in
applying theoretical concepts in real life decision making situations. We are
therefore becoming the pioneers in CA EDUCATION providers to have introduced
case studies into our preparatory tool kit.
How does a student revise all the concepts and formulas learnt in class its simple
use our secret sauce and cheat sheet and mind map-these are leveraging tools for
fast track revision.
We will nd that the SFM paper throws up around 20 marks of optional theory in
the exam. Most of it is prepared in class and the rest is captured in this theory book.
4. MODEL TEST PAPERS : A er completing the entire curriculum , students are
advised to take mock exams from this book in a time bound environment

Lets put in our best to achieve perfection in the subject of SFM.

ALL THE BEST
Sanjay Saraf

Notes