You, a foreign exchange dealer of your bank, are informed that your bank has sold a T.T. on Copenhagen for Danish Krone 10,00,000 at the rate of…

CA Final · Advanced Financial Management · MTP · May 2026
You, a foreign exchange dealer of your bank, are informed that your bank has sold a T.T. on Copenhagen for Danish Krone 10,00,000 at the rate of Danish Krone (DKK) 1 = INR 14.4480. You are required to cover the transaction either in London or New York market though your bank has correspondent banking relationship in London. The rates on that date are as under: INR 124.2000 INR 124.2300 Mumbai-London INR 124.2000 INR 124.2300 Mumbai-New York INR 94.0100 INR 94.0390 London-Copenhagen DKK 08.6000 DKK 8.6150 New York-Copenhagen DKK 06.5100 DKK 06.5250 Advise the bank in which market it will be better to cover the transaction, London or New York, and what will be the exchange profit or loss on the transaction? Note: 1. Ignore brokerages. 2. All intermediate calculations should be rounded off to two decimal places, while the final computation in INR should be rounded off to the nearest whole number.

Suggested Answer and Working Notes:

Amount realized on selling Danish Krone 10,00,000 at INR 14.4480 per Krone = INR 1,44,48,000. Cover at London: Bank buys Danish Krone at London at the market selling rate. Pound sterling required for the purchase (DKK 10,00,000 ÷ DKK 8.6000) = GBP 1,16,279.07 Bank buys locally 1,16,279.07 for the above purchase at the market selling rate of INR 124.2300. The rupee cost will be = INR 1,44,45,349 Profit (INR 1,44,48,000 - INR 1,44,45,349) = INR 2,651 Cover at New York: Bank buys Krones at New York at the market selling rate. Dollars required for the purchase of Danish Krone (DKK 10,00,000 ÷ 6.5100) = USD 1,53,609.83 Bank buys locally USD 1,53,609.83 for the above purchase at the market selling rate of INR 94.0390. The rupee cost will be = INR 1,44,45,315 Profit (INR 1,44,48,000 - INR 1,44,45,315) = INR 2,685 Advice: Though the transaction covered through New York gets very slightly more profitable by INR 34 but it is advisable to cover the transaction through London market as the bank has correspondent banking relationship in the London.

Topics: Foreign Exchange Exposure and Risk Management

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