Forex Management

General Instructions:

Code: PFX1E

The Student should submit this assignment in the handwritten form (not in the typed format) The Student should submit this assignment within the time specified by the exam dept The student should only use the Rule sheet papers for answering the questions. The student should attach this assignment paper with the answered papers.

Failure to comply with the above Four instructions would lead to rejection of assignment.
Specific Instructions:
There are four Questions in this assignment. The student should answer all the four questions. Marks allotted 100. Each Question carries equal marks (25 marks) unless specified explicitly

Question No 1:

A) . Apart from the traditional role of buying and selling foreign currencies on spot and forward basis, Financial Derivatives instruments are designed to afford protection from exchange risk. Analyze the statement with respect to the features of Forex Derivatives. Discuss the differences between Options and Forward rates in Forex dealings . List the various types of Options Contracts and give the formula of BlackScholes model for Option pricing.
B) . You as a Forex Dealer have the following dealing position in Frankfurt. What must do you do to make it square? Your account in Frankfurt is overdrawn GBP 6,75,000. You have purchased Cheques which are in course of post and not yet credited to your account totaling GBP 6,28,000. You have forward contracts outstanding as follows : Sales Purchases GBP 1,66,88,000 GBP1,50,00,000

You have issued drafts not yet presented for payment for GBP 12,20,000 . You have long bills purchased in hand and not due for GBP 28,85,600.

Question No 2:

(A) Describe various Foreign Exchange Transaction Risk exposures. Discuss the various Hedging Tools
and their relevance in short term liability management of Forex dealings.

(B) What will be the cancellation charges payable by the Customer ,if any You had negotiated at sight bill
under an irrevocable letter of credit for USD 1,00,000 at Rs40.5200 and covered yourself by sale in the market for one month forward delivery at Rs 40.5400. However, it was found later that terms of L/C had not been complied with and that you had to recover your advance from the customer and cover your sale in the interbank market at Rs 40.6000. The Interbank rates for dollar were as under Spot USD1=Rs 40.5225/5275 One month =Rs 40.5800/5875

The merchant rates for dollar were as follows : TT USD 1 =Rs40.4800 40.5600 One month 40.5200 40.6200 (i) At what rate will you cancel your purchase contract? (ii) What will be the rupee equivalent will you recover from the customer? (iii) What will be the profit/Loss to the customer on the transaction Question No 3: A. Define a Documentary Credit. Describe the procedure for establishing a Foreign Letter of Credit along and explain briefly a) Back to back L/C b) Transferable L/C c) Confirmed L/C. B. on 5TH September an exporter brings a usance bill for 60 days from B/L Date i.e. 01.09.2007 for USD 100,000.00 (USD One Hundred Thousand only) drawn on Morocco with a request to purchase the same & credit the balance amount to his current accountInterbank rate on that day were USD 1 =INR 39.90/9150 Premiums Sept. 04/05 Oct . 07/08 Nov 10/11 Assuming that i) transit period is 25 days ii) Your margin .15% iii) 30% to be retained in EEFC A/C (Exchange Earners Foreign Currency Account). iv)Interest on export Finance 10% Calculate (iv) The rate at which you will purchase the bill? (v) The rupee equivalent that you will Credit to the customers account? (vi) Amount to be credited to EEFC a/c (vii) Interest to be recovered.

Question No 4:
This section is a case on Foreign Exchange Rates. You are required to answer the questions following it.

You are just one week young in your job as a treasury executive in a leading laptop trader/supplier in India. Earlier your company was sourcing assembled laptops from China, but with the incentives provided in the Budget of 2008 by the Finance Minister of India, your company is planning to enter assembly/manufacturing market in India. Now, your company is planning to source components and sub assemblies from Taiwanese firms. This will involve a lot of foreign exchange trading and contracts.

Since you are from a leading business school in India, your CEO has asked you to make a presentation to the top management on various possibilities relating to forex market in India. Question. What is all that you would like to tell the top management so as to establish your credibility?