Advice which of the two currencies should be attractive for EVML to borrow. (Assume 1 year = 360 days)

(a) 7 Borrowing Money in € Particulars Amount in € Borrowing Amount 5,00,000.00 Add: Interest @ 4.25% × 90/360 × €500,000 5,312.50 Amt. Repayable in € (A) 5,05,312.50 ₹/€ Spot Rate 90.35 Add: Swap Points 0.25 Applicable Rate (B) 90.60 Amount Repayable in ₹ (A) × (B) 4,57,81,312.50 Note: In case the amount repayable in € is rounded off then above repayable amount in ₹ shall be - 4,57,81,267 or - 4,57,81,358. Borrowing Money in $ Particulars Amount in $ Equivalent Amount in (₹ 5,00,000 × $1.0240) 5,12,000.00 Add: Interest @ 5% × 90/360 × $512,000 6,400.00 Repayable in $ (a) 5,18,400.00 $/€ Spot Rate 1.0220 Less: Swap Points 0.0015 1.0205 Equivalent Rate of €/$ (1/1.0205) = 0.9799 Equivalent Rate of ₹/$ (90.60 × 0.9799) or (90.60/1.0205) (b) = 88.78 Equivalent amount of repayment in ₹ ($518,400 × 88.78) (a) x (b) = 460,23,552 Note: If rounded off the equivalent rate upto 3 decimal points then above amount shall be approx.4,60,23,034 and if rounded off upto 4 decimal points then amount shall be approx.4,60,22,982. Decision: Since the cash outflow is least in case of borrowing in Euro, the amount should be borrowed in €. Alternative Solution If the company borrows in Euros, it will have to repay. €5,00,000 {1 + 0.0425(90/360)} = €5,05,312.50 The ₹/€90 day rate are 90.20/90.60. Thus, it must buy euros forward at 90.60. Thus, total payment will be €5,05,312.50 X 90.60 = 4,57,81,312.50 With a dollar loan, EVML would have to borrow at the rate of €1 = $1.0240. Thus, $5,12,000 (5,00,000 × $1.0240) to acquire €5,00,000. The repayment would be: $5,12,000 × {1+ 0.05 (90/360)} = $5,18,400 The $/€90 day outright rate is 1.0205/1.0230. Now to convert $ to rupees we need a cross rate ₹/$. We have to calculate the bid rate, as we would sell dollars to receive rupees. (₹ /$)bid = (₹ /€)bid × (€/$)bid = 90.60 × 1/1.0205 = 88.7800 Thus, EVML would have to pay ₹($5,18,400 x 88.78) = 4,60,23,552 to buy Euro forward to repay the loan. This is more than Euro loan by - 2,42,239.50. Therefore, finance manager of EVML should choose Euro loan and reject bank's suggestion.