Practice Set 1

International Finance

Prof. K Parmeswaran

October 31, 2010

Understanding the currency movements

1. Please find out whether you have any arbitrage opportunity when Interbank quotes are as follows:

Bank A – in London GBP/USD 1.6945/50

Bank B – in Singapore GBP/USD 1.6950/55

Bank C – in Dubai GBP/USD 1.6955/60

Solution: Buy GBP Bank A at 1.6950 Sell to Bank C at 1.6955. .

2. Record your comments under following circumstances. For answering this question you need not refer the exchange rate table in page no.1.

You have an import payable in GBP. You are having your short-term investments in CHF. Looking into your currency exposure and the market information, you can either choose to book forward contract or keep the transaction open.

You either have the choice of booking forward contract for both the legs or keep one leg open. Decision will be yours on your market perception.

Solution: Situation No.1

GBP/USD is expected to appreciate and USD/CHF is to depreciate

Book forward contract keep open

Action to be taken: To book forward contract for both or keep open position or book forward contract for one leg and keep the other open?

Situation No.2

GBP/USD is expected to depreciate and USD/CHF is to appreciate.

Keep open Book forward contract

Action to be taken: To book forward contract for both or keep open position or book forward contract for one leg and keep the other open?

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IMPORTANT NOTE:

1. Customer wants to undertake the following transactions.

2. You are the banker. You will be covering the transaction in the inter-bank market and quoting rates to your customer.

3. Please note that you are facing the market. Following table is the inter-bank market rate.

Inter-bank exchange rate schedule

Currency	Spot	Forward
London market quotes
		One month	Three month	Six month
GBP/USD	1.6415/20	22/21	61/60	123/120
EUR/USD	1.3940/45	05/10	20/30	35/40
USD/CHF	0.9390/95	20/15	30/20	45/40
USD/JPY	80.05/10	50/45	105/100	150/145
USD/RUB	31.27/29	20/25	60/65	110/115
Dubai market quotes
USD/AED	3.6665/6780
Singapore inter bank
USD/SGD	1.2240/50	10/15	30/35	40/45
Mumbai interbank
USD/INR	44.40/41	40/41	80/82	150/152

Step I - Please identify the base currency.

Step II – Identify the transaction from the bank’s position. Whether the bank will be buying or selling the base currency from / to the customer.

Step III – Accordingly, cover the transaction in the inter bank market and arrive at the base rate.

Step IV - Load your profit margin wherever applicable and quote the price the customer.

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1 Payment of import bill in EUR from your USD account. 1.3945

2 Export receivable in USD to be converted to RUB. 31.27

3 Inward remittance in CHF to be converted to USD. 0.9395

4 Import payment in GBP from your USD account. 1.6420

5 Export receivable in JPY to be converted to your USD account 80.10

6 Outward remittance in USD from your AED account 3.6780

7 Import payment in JPY from your USD account 80.05

8 Export receivable in EUR to be converted to USD 1.3940

9 Import payment in CHF from your USD account 0.9390

10 Outward remittance in INR from your USD account 44.40

11 Inward remittance in GBP to be converted to USD. 1.6415

12 Import payment in USD to be made from your RUB account 31.29

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Forward exchange rates

1. ABC wants to book 3 months FWD for his import payment in GBP against USD at:

Import payment

Spot: 1.6420

FWD differential 0.0060 (-)

3 months FWD 1.6360

2. Customer wants to book one month FWD for his export receivable in EUR against USD at:

Export receivable

Spot 1.3940

FWD differentials 0.0005 (+)

One month FWD 1.3945

3. Customer wants to cover three months forward for his export receivable in CHF against USD at:

Receivable in CHF. Market will sell USD against CHF to the client

Spot 0.9395

FWD differentials 0.0020 (-)

3 months FWD 0.9375

4. Customer wants to cover 6 month outward remittance in JPY against USD at:

Outward remittance in JPY. Market will buy USD against JPY

Spot 80.05

FWD differntials 01.50

6 months FWD 78.55

5. Customer wants to cover his export receivable in USD for 6 month FWD against INR at

Spot 44.40

FWD differentials 01.50

6 month FWD 45.90

6. Customer wants to cover his import payable in USD for 3 months against RUB

Spot 31.29

FWD differential 00.65

6 month FWD 31.94

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