Presidency College

Reaccredited 'A+' by NAAC

Kempapura, Hebbal, Bengaluru – 560024
www.presidencycollege.ac.in

Department of PG Commerce
IV Semester M.Com (F) Pre Final Examination- June 2020
Paper – 4.2: Forex Management

Time 3 Hours Max.Marks 70

Instruction: Answers should be written in English only.

Section-A

1. Answer any seven questions. Each question carries two marks. (7x2=14)

a. What is a Currency Pair?

b. Differentiate Dirty float and Clean float?
c. What do you mean by reverse Quote?
d. What is Arbitrage?
e. If the quote is 64.5030/6020, Calculate Spread?
f. What is Hedging?
g. Explain the terms call option and put option?
h .What is meant by marking to market?
i What is Indirect quote?
j. If the $/Yen spot rate is 1$ = Yen 110 and interest rates in Tokyo and Newyork are 3 and 4.5%
respectively. What is the expected dollar yen exchange rate one year hence?

Section-B

Answer any four questions. Each question carries five marks. (4x5=20)

2. Differentiate between Futures, options and swaps

3. Assume that as a result of covered interest arbitrage, the market forces caused the spot rate of
the pond to rise to $1.62 and that the 90 day forward of the pound declined to $ 1.5888.
4. Consider the results from using $ 800000 to engage in covered interest arbitrage.
You have $ 800000 to invest
The current spot rate of the pound is $1.60
The 90 days forward rate of the pound is $ 1.60
The 90 days interest in the USA is 2%.
The 90 days interest rate in the UK is 4%.
 Presidency College
Reaccredited 'A+' by NAAC
Kempapura, Hebbal, Bengaluru – 560024
www.presidencycollege.ac.in

Explain in purchasing power parity theory?

5.. Explain the functions of foreign exchange market.
6. The US dollar is selling in India at Rs65.50.if the interest rate for 6 months borrowing in India
is 10% per annum and the corresponding rate in USA is 4%.
a. Do you expect that US dollar will be at a premium or at discount in the Indian forex
market?
b. What will be the expected 6 months forward rate for US dollar in India?
c. What will be the rate of forward premium or discount?
7. What are the features of Interest rate caps ,floors and collars?

Section-C

Answer any three questions. Each question carries twelve marks (3x12=36)

8 From the following information.Find call and put option values using Black-Scholes model

Spot rate: Rs 76.54/ϵ,strike rate(E): rs78.25/ϵ,Maturity period-6 months,continuous

compounding interest rate-105 p.a, standard deviation-0.60

9. DC corporation is a US based software consulting firm specializing in financial software for

several fortune 500 clients. It has offices in India, UK,Europe and Australia. In 2002,DC
required £100000 in 180 days and had 4 options before it

a. Forward market hedge

b. money market hedge
c. option hedge
d. No hedge
Its analysis developed the following information which was used to assess the alternative
solutions.
Current Spot rate of pound=$1.50
180 days forward rate of pounds as of today=$1.48
Interest rates were as follows:
particulars UK US
180 days 4.5% 4.5%
deposit rate
180 days 5.1% 5.1%
borrowing rate
The company also had the following information
 Presidency College
Reaccredited 'A+' by NAAC
Kempapura, Hebbal, Bengaluru – 560024
www.presidencycollege.ac.in

A call option on pound that expires in 180 days has an exercise price of $1.49 and a
premium of $0.03A put option on pound that expires in 180 days has an exercise price of $1.50
and a premium of $0.02

The future spot rates in 180 days were forecasted as follows:

Possible outcome Probability

$1.44 20%
$1.46 60%
$1.53 20%

10. Explain International Monetary system in detail

11. You have called your foreign exchange trader and asked for quotation on the spot, 1 month, 3
month and 6 month forward rate. The trader has responded with the following.
$0.2479/81, 3/5, 8/7, 13/10

a) What does this mean in terms of $ per euro?

b) If you wished to buy Spot euros, how much would you have to pay in $?

c) If you wanted to purchase Spot US$, how much would you have to pay in euro.

d) What is the Premium and Discount in the 1, 3 and 6 month forward rate in annual
percentage(assuming you are buying euros

12. IRP Ltd is the U.K. Subsidiary of an Indian IT company. The company’s Balance sheet is
thousands of pound sterlings (£) for 1-1-2016 is given below

Assets Amount Liabilities Amount

Cash 150000 Current Liability 90000

Accounts receivable 330000 Long term debt 240000

Inventory 480000 Capital stock 930000

Net Plant and machinery 300000

 Presidency College
Reaccredited 'A+' by NAAC
Kempapura, Hebbal, Bengaluru – 560024
www.presidencycollege.ac.in

1260000 1260000

a. Determine IRPs accounting exposure on 1-1-2017 using

1) Current rate method

2) Monetary and non monetary method

b. Calculate the company’s contribution to its parent accounting profit/loss if the exchange rate
on 31-12-2016 was 1£ = Rs 82.1545