An Indian company obtains the following quotes (₹ /$) Spot: 85.90/86.10 3 - Months forward rate: 86.00/86.25 6 - Months forward rate: 86.10/86.40…

(a) (i) If company borrows in $ then outflow would be as follows: Let company borrows $ 100 = $ 100.00 Add: Interest for 6 months @ 5.5% = $ 2.75 Amount Repayable after 6 months = $ 102.75 Applicable 6 month forward rate = 86.40 Amount of Cash outflow in Indian Rupees = 8,877.60 If company borrows equivalent amount in Indian Rupee, then outflow would be as follows: Equivalent amount - 86.10 x 100 = 8,610.00 Add: Interest @11.50% for months = 495.08 = 9,105.08 Since cash outflow is more in ₹ borrowing then borrowing should be made in $. (ii) (a) Let 'i r ' be the interest rate of ₹ borrowing make indifferent between 3 months borrowings and 6 months borrowing then (1 + 0.03) (1 + i r ) = (1 + 0.0575) i r = 2.67% or 10.68% (on annualized basis) (b) Let 'i d ' be the interest rate of $ borrowing after 3 months to make indifference between 3 months borrowings and 6 months borrowings. Then, (1 + 0.015) (1 + i d ) = (1 + 0.0275) i d = 1.232% or 4.93% (on annualized basis)