Mr. X gets the following 2-way quotes in the foreign exchange market: Spot 2-months Forward ₹/US$ 86.00/86.20 88.00/88.40 Calculation upto two…

CA Final · Advanced Financial Management · PYQS · May 2025
Mr. X gets the following 2-way quotes in the foreign exchange market: Spot 2-months Forward ₹/US$ 86.00/86.20 88.00/88.40 Calculation upto two decimal place. You are required to calculate - I. How many US Dollars should Mr. X sell to get - 40,00,000 after 2 months? II. How many Rupees Mr. X is required to pay to obtain US$ 3,00,000 in the spot market? III. Assume that Mr. X has US$ 75,000 in current account earning no interest. Return on Investment (ROI) on rupee investment is 12% per annum. Should Mr. X convert the US$ now or 2 months later?

Suggested Answer and Working Notes:

(i) US $ required to get 40lakhs after 2 months at the Rate of 88/$ = 40,00,000 / 88 = US $ 45454.55 (ii) ₹ required to get US$ 3,00,000 now at the rate of 86.20/$ US $ 3,00,000 × ₹ 86.20 = 2,58,60,000 (iii) Encashing US $ 75,000 Now Vs 2 month later Proceed if we can encash in open mkt $ 75000 × ₹ 86 = 64,50,000 Opportunity gain= 1,29,000 Likely sum at end of 2 months - 65,79,000 Proceeds if we can encash by forward rate : $ 75000 × ₹ 88.0066,00,000 It is better to encash the proceeds after 2 months and get opportunity gain. Alternative Solution to Sub Part (iii) Forward Premium: Forward bid rate = 88.00, Spot bid rate = 86.00. Premium = (Forward rate – Spot rate) ÷ Spot rate × (12/2) × 100 (annualized %). Premium = (₹ 88.00 - 86.00) ÷ ₹ 86.00 × 6 = (2/86) × 6 = 0.023256 × 6 × 100 (annualized %). = 13.95% p.a. INR Interest Rate: 12% p.a. Comparison: Forward premium (13.95%) > INR interest rate (12%). This indicates the forward rate offers a better return than investing INR, favoring conversion after 2 months.

Topics: Foreign Exchange Exposure and Risk Management

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