SFM Forex Compiler - goood PDF

Preview

Summary

goood...

Description

CA - FINAL SFM - COMPILER

FOREX

PROF. RAHUL MALKAN

WWW.RAHULMALKAN.COM CONTACT NO - 8369095160

2

SFM - COMPILER

Forex Years 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 (Old) 2018 (New)

May RTP NA Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Nov Paper NA YES YES N0 Yes Yes Yes Yes Yes Yes Yes Yes

RTP Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

Paper Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

2008 Question 1 : Nov 2008 RTP (a) On 1st July 2008, 3 months interest rate in the US and Germany are 6.5 per cent and 4.5 per cent per annum respectively. The $/DM spot rate is 0.6560. What would be the forward rate for DM for delivery on 30th September 2008? (b) In International Monetary Market an international forward bid on December, 15 for one Euro ( €) is $ 1.2816 at the same time the price of IMM € future for delivery on December, 15 is $ 1.2806. The contract size of Euro is € 62,500. How could the dealer use arbitrage in profit from this situation and how much profit is earned? Solution (a) Spot

USD 0.6560

DM 1.000

Interest rate p.a. Interest for 92 days

6.5% 1.625%

4.5% 1.125%

According to IRP (Interest Rate Parity) 1 + iA F = 1 + iB S 101625 F 0.6560 = 1.01125 0.6560 x 1.01625 therefore F = = 0.6592 1.01125 (b) Buy€ 62500 × 1.2806

= $ 80037.50

Sell€ 62500 × 1.2816

= $ 80100.00

Profit

$ 62.50

Alternatively if the market comes back together before December 15, the dealer could unwind his position (by simultaneously buying € 62,500 forward

SFM - COMPILER

and selling a futures contract. Both for delivery on December 15) and earn the same profit of $ 62.50. Question 2 :

Nov 2008 RTP

XYZ Ltd. is considering a project in Luxemburg, which will involve an initial investment of € 1,30,00,000. The project will have 5 years of life. Current spot exchange rate is Rs.58 per €. The risk free rate in Germany is 8% and the same in India is 12%. Cash inflow from the project are as follows: Year

Cash inflow

1

€30,00,000

2

€25,00,000

3

€35,00,000

4

€40,00,000

5

€60,00,000

Calculate the NPV of the project using foreign currency approach. Required rate of return on this project is 14%. Solution (1 + 0.12) (1 + Risk Premium) = (1 + 0.14) Or, 1 + Risk Premium = 1.14/1.12 = 1.0179 Therefore, Risk adjusted dollar rate is = 1.0179 x 1.08 = 1.099 – 1 = 0.099 Calculation of NPV Year

Cash flow (Million) €

PV Factor at 9.9%

PV

13.00

0.910

2.73

2

2.50

0.828

2.070

3

3.50

0.753

2.636

4

4.00

0.686

2.744

5

6.00

0.624

3.744 13.924

Less: Investment NPV Therefore, Rupee NPV of the project is

13.000 0.924

= Rs.(58 x 0.924) Million = Rs.53.592 Million

Question 3:

Nov 2008 RTP

In March, 2008, the Zed Pro Industries makes the following assessment of dollar rates per British pound to prevail as on 1.9.2008: $/Pound

Probability

1.60

0.15

1.70

0.20

1.80

0.25

1.90

0.20

2.00

0.20

3

4

SFM - COMPILER

(i)

What is the expected spot rate for 1.9.2008?

(ii) If, as of March, 2008, the 6-month forward rate is $ 1.80, should the firm sell forward its pound receivables due in September, 2008? Solution (i)

Calculation of expected spot rate for September, 2008: $ for £

Probability

Expected$/£

(1)

(2)

(1) × (2) = (3)

1.60

0.15

0.24

1.70

0.20

0.34

1.80

0.25

0.45

1.90

0.20

0.38

2.00

0.20

0.40

1.00

EV =1.81

Therefore, the expected spot value of $ for £ for September, 2008 would be $ 1.81. (ii) If the six-months forward rate is $ 1.80, the expected profits of the firm can be maximised by retaining its pounds receivable. Question 4:

Nov 2008 RTP

On July 28, 2008 Unicon (an importer) requested a bank to remit Singapore Dollar (SGD) 2,50,000 under an irrevocable LC. However, due to bank strikes, the bank could effect the remittance only on August 4, 2008. The interbank market rates were as follows: July, 28

August 4

Bombay US$1

= Rs.45.85/45.90

45.91/45.97

London Pound 1

= US$ 1.7840/1.7850

1.7765/1.7775

Pound 1

= SGD 3.1575/3.1590

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?

Solution On July 28, 2008 the importer customer requested to remit SGD 2,50,000. To consider sell rate for the bank: US $ = Rs.45.90 Pound 1 = US$ 1.7850 Pound 1 = SGD 3.1575 `45.90 x $1.7850 SGD 3.1575 SGD 1 = Rs.25.9482 Add: Exchange margin (0.125%) Rs. 0.0324 Rs.25.9806

Therefore, SGD 1 =

SFM - COMPILER

On August 4, 2008 the rates are US $ Pound 1 Pound 1

= Rs.45.97 = US$ 1.7775 = SGD 3.1380

`45.97 x $1.7775 SGD 3.1380 SGD 1 = Rs.26.0394 Add: Exchange margin (0.125%) Rs. 0.0325 Rs. 26.0719 Hence, loss to the importer = SGD 2,50,000 (Rs.26.0719 – Rs.25.9806) = Rs.22,825 Therefore, SGD 1 =

Question 5:

Nov 2008 RTP

An Indian company is planning to set up a subsidiary in US. The initial project cost is estimated to be US $40 million; Working Capital required is estimated to be $4 million. The finance manager of company estimated the data as follows: Variable Cost of Production (Per Unit Sold)

$2.50

Fixed cost per annum

$ 3 Million

Selling Price

$ 10

Production capacity

5 million units

Expected life of Plant

5 years

Method of Depreciation

Straight Line Method (SLM)

Salvage Value at the end of 5 years

NIL

The subsidiary of the Indian company is subject to 40% corporate tax rate in the US and the required rate of return of such types of project is 12%. The current exchange rate is Rs.48/US$ and the rupee is expected to depreciate by 3% per annum for next five years. The subsidiary company shall be allowed to repatriate 70% of the CFAT every year along with the accumulated arrears of blocked funds at the end of 5 years, the withholding taxes are 10%. The blocked fund will be invested in the USA money market by the subsidiary, earning 4% (free of taxes) per year. Determine the feasibility of having a subsidiary company in the USA, assuming no tax liability in India on earnings received by the parent company from the US subsidiary. Solution Working Notes: (1) Cash Outflow (Initial)

(Figures in Million)

Cost of Plant & Machinery

$40

Working Capital Requirement

$4

Cash outflow in Rs.(Millions)

$44

Cash outflow in Rs.(Millions)

2112

5

6

SFM - COMPILER

(2) Annual Cash Inflow Sales Revenue (5 Million X $10)

50.00

Less: Costs Variable Cost (5 Million units × $2.5) $12.5 Fixed Cost

$3

Depreciation ($40 Million/ 5year)

$8

23.50

Earning before tax

26.50

Less: Taxes (40%)

10.60

Earning after tax

15.90

Add:Back Depreciation

8.00

Cash Flows

23.90

(3) Terminal year Cash Flows Release of Working Capital

$4 Million

Salvage Value

Nil

$4 Million (4) Calculation of exchange Rate over a period of 5 years. Year 0

Expected Rate = 48.00

1

103 48 x 100

= 49.44

2

103 49.44 x 100

= 50.9232

3

103 50.9232 x 100

= 52.4509

4

103 52.4509 x 100

= 54.0244

5

103 54.0244 x 100

= 55.6451

(5) Calculation of Repatriable /Accessible Funds Period

Particulars

Millions$

1-4 years

Operating Cash Flow After Tax

23.90

Less: Retention Repatriable amount Less: Withholding Tax

7.17 16.73 1.673

Accessable Funds 5 year

Operating Cash Flow After Tax Less: Withholding Tax

15.057 23.90 2.39 21.51

Add:Repatriation of Blocked Funds*

27.40

Accessible Funds

48.91

*Future Value of Blocked Funds of $7.17 Million shall be computed as follows: Value of Funds blocked from year 1-4

7.17 M$

SFM - COMPILER

PV AF (4%, 4)

4.246

Value of Funds at end

30.4438 M$

Withholding Tax

3.0444 M$ 27.3994 M$

Statement Showing Net Present Value of the Project Period

Particulars

Cash Flow US$

Rs.

Exchange Rate

PV@12%

PV

0

Initial Outflow

44

48

(2112)

1

1

Annual Cash Flow

15.057

49.44

744.42

0.893

664.77

2

“

15.057

50.9232

766.75

0.797

611.10

3

“

15.057

52.4509

789.75

0.712

562.30

4

“

15.057

54.0244

813.45

0.636

517.35

5

“

48.91

55.6451

2721.60 0.567

1543.15

6

Release of WC

4.00

55.6451

222.58

126.20

0.567

(2112)

1912.87

Decision : Since NPV of the project is positive, the Indian Company should go for its decision of subsidiary in US. Question 6:

Nov 2008 Paper – 6 Marks

An exporter is a UK based company. Invoice amount is $3,50,000. Credit period is three months. Exchange rates in London are : Spot Rate ($/£)

1.5865 – 1.5905

3-month Forward Rate ($/£)

1.6100 – 1.6140

Rates of interest in Money Market : Deposit

Loan

$

7%

9%

£

5%

8%

Compute and show how a money market hedge can be put in place. Compare and contrast the outcome with a forward contract. Solution An Uk firm can hedge its exposure by Money Market Operations UK Firm - $ 3,50,000 receivable after 3 months MMC ( Borrow – sell – invest ) Step 1 : Borrow $ so that amt payable is $ 3,50,000 after 3 months @9% P.A i.e 2.25% per quarter Amount to be borrowed: 3,50,000 / 1.0225 = $ 3,42,298.29 Step 2 : Convert: Sell $ and buy £. The relevant rate is the Ask rate, namely, 1.5905 per £, (Note: This is an indirect quote).

7

8

SFM - COMPILER

Amount of £s received on conversion is 2,15,214.27 (3,42,298.29 / 1.5905). Step 3 : Invest: £ 2,15,214.27 will be invested at 5% for 3 months Amount receivable after 3 months £ 2,17,904.45 Question 7 :

Nov 2008 Paper – 6 Marks

An Indian exporting firm, Rohit and Bros., would be cover itself against a likely depreciation of pound sterling. The following data is given : Receivables of Rohit and Bros : £500,000 Spot rate : Rs.56,00/£ Payment date : 3-months 3 months interest rate : India : 12 per cent per annum : UK : 5 per cent per annum What should the exporter do? Solution Indian exporter can hedge his exposure through money Market Operation Indian exporter - £ 5,00,000 receivable after 3 months MMC (Borrow – sell – invest) Step 1 : Borrow £ so that amt payable is £ 5,00,000 after 3 months 5,00,000 Amount to be Borrowed = 1.0125 = £ 4,93,827.1605 Step 2 : Sell Rs.493827.1605 at spot Rs./ £ 56 Amt receivable = 493827.1605 x 56 = Rs.2,76,54,320.988 Step 3 : Invest Rs.2,76,54,320.988 for 3 months Amount Receivable = 2,76,54,320.988 *1.03= Rs.2,84,83,950.6176 Question 8 :

Nov 2008 Paper – 4 Marks

The rate of inflation in USA is likely to be 3% per annum and in India it is likely to be 6.5%. The current spot rate of US $ in India is Rs..43.40. Find the expected rate of US $ in India after one year and 3 years from now using purchasing power parity theory. Solution According to Purchasing Power Parity theory F 1 + iA S = 1 + iB Where

F

= Forward Rate

S iA

= Spot Rate = Rs.inflation Rate and

iB = $ Inflation Rate After 1 Year 1 + 0.065 F 42.40 = 1 + 0.03 therefore F = Rs.44.8751 After 3 Years 1.065 1.065 1.065 F = 42.40 x 1.03 x 1.03 x 1.03 = Rs.47.9762

SFM - COMPILER

Question 9 : Nov 2008 Paper – 4 Marks On April 1, 3 months interest rate in the UK £ and US $ are 7.5% and 3.5% per annum respectively. The UK £/US $ spot rate is 0.7570. What would be the forward rate for US $ for delivery on 30th June ? Solution According to Interest Rate Parity theory F 1 + iA S = 1 + iB Where

F S

= Forward Rate = Spot Rate

iA

= £ Interest Rate for 3 months = 7.5% P.A i.e 1.875% for 3 months

iB

= $ Interest Rate for 3 months = 3.5% P.A i.e 0.875% for 3 months

After 3 months F 1 + 0.01875 0.7570 = 1 + 0.00875 , therefore F = 0.7645 UK £/US $ 2009 Question 10 :

May 2009 RTP

An MNC company in USA has surplus funds to the tune of $ 10 million for six months. The Finance Director of the company is interested in investing in DM for higher returns. There is a Double Tax Avoidance Agreement (DTAA) in force between USA and Germany. The company received the following information from London: €/$ Spot

0.4040/41

6 months forward

67/65

Rate of interest for 6 months (p.a.)

5.95%– 6.15%

Withholding tax applicable for interest income

22%

Tax as per DTAA

10%

If the company invests in £,what is the gain for the company? Solution $ 10 million converted @ € 0.4040/$ = $10,000,000 × 0.4040 = and invested @ 5.95% for6 months in Luxemburg will fetch :

€4,040,000

€ 4,040,000 (1+ 0.0595/2)

= € 4,160,190

Interest earned =€(4,160,190 – 4,040,000)

=

€ 120,190

Withholding Tax @ 10% (in view of DTAA)

=

€ 12,019

Net interest eligible for repatriation

=

€ 108,171

Amount repatriated after 6 months=€ 108,171 + € 4,040,000

= € 4,148,171

Amount received at the forward rate o f € 0.3976/$ =€4,148,171/0.3976 = 10,433,026 Additional amount fetched =$10,433,026-$10,000,000

= $ 433,026.

9

10

SFM - COMPILER

Question 11 : May 2009 RTP BC Export Co are holding an Export bill in United States Dollar (USD) 1,00,000 due 60 days hence. Rate at which deal was finalized @ Rs.47.50 per USD. The Company is worried about the fluctuating exchange rate. The Firm’s Bankers have agreed to make advance against the bill after deduction of interest 9% per annum and also quoted a 60- day forward rate of Rs.48.10. The cost of capital for the exporter is 15% p.a. Advise whether the exporter will agree to the banker’s offer. Solution Value of the export in INR Interest @ 1.5% for 60 days Net Amount to be received Cost of the fund @ 15% p.a for 2 months Net Saving ( cost of fund– interest ) Difference to be paid after 60 days at forward rate (48.10– 47.50) x 1,00,000

Rs. 47,50,000 71,250 46,78,750 1,42,362 71,112 60,000

Hence the exporter should agree to the offer of his banker. Question 12 :

May 2009 RTP

Spot rate 1 US $ = Rs.47.7123 180 days Forward rate for 1 US $ = Rs.48.6690 Interest rate in India = 12% p.a Interest rate in USA = 8% p.a An arbitrageur takes loan of Rs. 40,00,000 from Indian Bank for 6 months and goes for arbitrage. What is his gain or loss? (Take 1 year = 360 days) Solution Amount he receives in dollar =40,00,000/47.7123 Interest earned by him @ 8% Net Amount received by him after six months After conversion he will receive in Rupees @ Rs.48.6690 Amount to be paid to Indian Banker with interest for six months Gain to the arbitrageur

$ 83,835.82 $ 33,53.43 $ 87,189.25 Rs.42,43,414 Rs.42,40,000 Rs.3,414

Question 13 : May 2009 RTP – Similar to Question 4 – Nov 2008 RTP Question 14: May 2009 Paper – 6 Marks 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 management’s guidelines had to square – up the position when the quotations were: Spot US $ 1 INR 31.4300/4500

SFM - COMPILER

1 month margin 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? Solution 1 The amount of EUR bought by selling USD 10,00,000 * 1.4400 = EUR 14,40,000 2 The amount of EUR sold for buying USD 10,00,000 * 1.4450 = EUR 14,45,000 3 Net Loss in the Transaction = EUR 5,000 To acquire EUR 5,000 from the market @ (a) USD 1 = EUR 1.4400 & (b) USD1 = INR 31.4500 Cross Currency buying rate of EUR/INR is Rs.31.4500 / 1.440 i.e. Rs.21.8403 Loss in the Transaction Rs.21.8403 * 5000 = Rs.1,09,201.50 Question 15:

May 2009 Paper

You have following quotes from Bank A and Bank B: Bank A

Bank B

SPOT

USD/CHF 1.4650/55

USD/CHF 1.4653/60

3 months

5/10

6 months

10/15

SPOT

GBP/USD 1.7645/60

3 months

25/20

6 months

35/25

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? Solution (i)

To BUY 1 Million GBP Spot against CHF 1.

First to BUY USD against CHF at the cheaper rate i.e. from Bank A. 1 USD = CHF 1.4655

2.

Then to BUY GBP against USD at a cheaper rate i.e. from Bank B 1 GBP= USD 1.7650 By applying Cross Rate Buying rate would be 1 GBP = 1.7650 * 1.4655 CHF 1 GBP = CHF 2.5866

Amount payable CHF 2.5866 Million or CHF 25,86,600

11

12

SFM - COMPILER

(ii) Spot rate Bid rate Offer ra...