1

CFM Centre for Financial Management

January 2006

EXAMINATION BOOKLET

Certified Financial Manager Programme

PAPER 3 : TREASURY AND FOREX MANAGEMENT

Time allowed : 4 hrs Marks : 100

Name : Signature :

Roll No :

Instructions

1. Return the entire examination booklet after you are through. You are
not allowed to take the examination booklet outside the examination
hall.
2. For multiple choice questions circle the right answer. If you circle
more than one answer you will not get any marks for that question.
3. Show all the workings in the spaces provided. Without the supporting
workings, you will not get any marks even if you circle the right
answer.
4. If some information is missing in a problem, you can make suitable
assumptions
5. You may use the blank pages at the end or other blank spaces for
rough work. No additional sheets will be provided.
6. Do not unstaple, fold, or mutilate the examination booklet.
7. You can use an electronic calculator.
8. A set of tables (interest rate and normal distribution) have been
appended at the end. Please return them along with the examination
booklet.
9. Switch off your cellphones.

This booklet has 24 pages.

 2

SOME FORMULAE

• Formulae for a and b in a two-variable linear discriminant function:

σy 2 . dx – σxy . dy
a =
σx 2 .σy2 – σxy . σxy

σx2 . dy – σxy . dx
b =
σx 2. σy2 – σxy . σxy

2bT
• Baumol Model : C =
I

• Miller and Orr Model

3bσ 2
Return Point = + LL
3 4I
 3

PART A : OBJECTIVE QUESTIONS

Each question carries 1 mark

1. In the portfolio balance approach, which one of the following, other things equal, will
cause an increase in the demand for domestic bonds by home country citizens?
a. A decrease in the home country interest rate.
b. An increase in the home country price level.
c. An increase in the home country real income level.
d. A decrease in the expected rate of depreciation of the home currency (or a
decrease in the expected rate of appreciation of the foreign currency).
e. None of the above
2. Which among the following is not offered as an explanation of why firms hedge
currency exposure
a. Interlinkage between investment decisions and internal funds availability.
b. Undesirable consequences of temporary cash flows difficulties
c. Agency conflicts between stockholder and bondholders
d. Firms’desire to improve cash budgeting
e. None of the above
3. Exposure to a risk factor is:
a. A measure of the amount of loss the firm would incur if the risk factor
changes by a specified amount.
b. A measure of the sensitivity of the firm’s performance index to
unanticipated variations in the risk factor
c. A measure of the total value of claims the firm owns on a particular
counterparty.
d. A measure of the firm’s net asset position in a particular currency or
country.
e. None of the above
4. Which of the following is an incorrect statement
a. If a firm invoices all its transactions in its home currency it would have no
operating exposure.
b. Even if a firm has no export or import transactions, it may have operating
exposure to exchange rates.
c. Operating exposure arises because changes in costs and revenues are out of
line with changes in exchange rates
d. None of the above
5. The term “hedge ratio” denotes
a. The ratio of future price to spot price
b. The ratio of the value of futures position to cash market position
 4

c. The ratio of number of hedgers to number of speculators in the futures

market
d. The ratio of trading volume in futures to trading volume in the spot market
for the underlying.
e. None of the above
6. A drop-lock provision in a syndicated loan
a. Fixes the exchange rate between the currency of a syndicated loan and the
borrower’s home currency
b. Fixes the spread over the floating index which the borrower has to pay.
c. Allows the borrower to change the floating index to which the interest rate is
tied.
d. Converts a floating rate loan into a fixed rate loan when the floating index
hits a specified floor.
e. None of the above
7. Contango refers to the situation when
a. The price of a far contract is higher than that of a near contract
b. Spot price exceeds future price
c. Futures price exceeds forward price
d. Futures price first rises then falls
e. None of the above
8. An interest rate cap is
a. A portfolio of put options on interest rate
b. A portfolio of FRAs
c. A portfolio of call options on interest rate.
d. A short call and a long put on interest rate
e. None of the above
9. In the choice of a currency to invest surplus funds for short horizons without incurring
currency risk the treasurer should be guided by
a. The nominal interest rates offered on deposits in the various currencies.
b. Historical rates of inflation in the various countries
c. Political stability of the various countries
d. The choice of currency does not matter
e. None of the above
10. In determining the total risk of a multi-currency equity portfolio
a. The variances of exchange rates do not matter.
b. The variances of local returns do not matter
c. The expected values of exchange rate changes do not matter
d. The covariances between exchange rate changes and local returns do not
matter.
e. None of the above
 5

PART B : PROBLEMS

1. Topnotch Corporation requires Rs.45 million in cash for meeting its transaction needs
over the next six months, its planning horizon for liquidity decisions. Topnotch
currently has the amount in the form of marketable securities. The cash payments will
be made evenly over the six month planning period. Topnotch earns 6 percent annual
yield on its marketable securities. The conversion of marketable securities into cash
entails a fixed cost of Rs.1,500 per transaction. What is the optimal conversion size as
per the Baumol model ?
Marks :2
a. Rs.1,127,380
b. Rs.2,121,320
c. Rs.2,586.780
d. Rs.3,217,520
e. None of the above

Working :
T = 45,000,000 0.06 b = 1,500
I= = 0.03
2

According to the Baumol model:

2bT 2 x 1500 x 45,000,000

C= =
I 0.03

= Rs.2,121,320

2. Premier Limited expects its cash flows to behave in a random manner, as assumed by
the Miller and Orr model. The following information has been gathered.
• Annual yield on marketable securities = 5 percent
• The fixed cost of effecting a marketable securities transaction = Rs. 800
• The standard deviation of the change in daily cash balance = Rs.12,000
• The management wants to maintain a minimum cash balance of Rs.1,500,000

What are the ‘return point’ and ‘upper control point’?

Marks : 2
a. Rs. 1,121,557 and Rs.1,364,672
b. Rs. 985,479 and Rs.1,145,831
c. Rs. 1, 786,000 and Rs.1,976,540
d. Rs. 1,585,343 and Rs. 1,756,029
e. None of the above
 6

Working :
I = 0.05/360 = 0.000139

3bσ2
RP = 3 + LL
4I

3 x 800 x 12,000 x 12,000

= 3 + 1,500,000 = 1,585,343
4 x 0.000139

UL = 3 RP – 2LL = 1,756,029

3. The present credit terms of Globus Corporation are 2/10, net 40. It sales are Rs.650
million, its average collection period is 30 days, its variable costs to sales ratio, V, is
0.75, and its cost of capital is 10 percent. The proportion of sales on which customers
currently take discount, is 0.3. Globus is considering relaxing its credit terms to 3/10, net
40. Such a relaxation is expected to increase sales by Rs.30 million, increase the
proportion of discount sales to 0.5, and reduce the ACP to 20 days. Globus’s tax rate is
35 percent.
What will be the effect of liberalising the cash discount on residual income?
Marks : 2
a. Rs.2,460,556
b. Rs.2,550,556
c. Rs.3,122,285
d. Rs.3,333,333
e. None of the above.
Working :
∆ RI = [∆S (1 – V) – ∆DIS] (1 – t) + R ∆ I
∆ DIS = pn (So + ∆S)dn – poso do

= 0.5 [650,000,000 + 30,000,000] .03 – 0.30 [650,000,000] .02

= 10,200,000 – 3,900,000 = 6,300,000
650,000,000 30,000,000
∆I = (30 – 20) – 0.75 x x 20
360 360
= 18,055,556 – 1,250,000 = 16,805,556

∆ R I = [30,000,000 (0.25) – 6,300,000] (0.65) + 0.10 x 16,805,556

= 780,000 + 1,680,556
= 2,460,556
 7

4. The financial manager of a firm is wondering whether credit should be granted to a

new customer who is expected to make a repeat purchase. On the basis of credit
evaluation, the financial manager feels that the probability that the customer will pay is
0.60 and the probability that the customer will default is 0.40. Once the customer pays
for the first purchase, the probability that he will pay for the repeat purchase increases
to 0.95. The revenue from the sale will be Rs.60,000 and the cost of the sale would be
Rs.40,000 – these figures apply to both the initial and the repeat purchase.
What is the expected payoff if the credit is granted?
Marks : 2
a. Rs.1,220
b. Rs.7,400
c. Rs.2,500
d. Rs.6,200
e. None of the above

Working : Pays 20,000

Offer credit 0.95
Pays 20,000
Defaults
- 40,000
0.60
Offer credit 0.05

Defaults - 40,000
0.40

Expected payoff = 0.6 [20,000] – 0.4 [40,000] + 0.6 [0.95 (20,000) – 0.05(40,000)]
= 16,000 – 20,000 + 0.8 [8000]
= Rs.6200

5. Johar Traders sells on terms 2/20, net 40. Annual sales are Rs.750 million. 25 percent
of its customers pay on the 10th day and take the discount. If the accounts receivable
average Rs.60 million, what is the average collection period (ACP) on non- discount
sales ?
Marks : 2
a. 20.5 days
b. 27.3 days
c. 31.7 days
d. 33 days
e. None of the above
 8

Working :

Discount sales
Accounts receivable = [ACP on discount sales]
360
Non-discount sales
+ [ACP on non-discount sales]
360

0.25 x 750 0.75 x 750

60 = [20] + [ACPND]
360 360

10.417 + ACP x 1.563 = 60

1.563 A= 49.583
A = 31.7

6. A Bank in the U.S can attract 6-month deposit by paying interest at 4.5% p.a. It has to
pay a deposit insurance of 0.05% p.a and the reserve requirement against the deposit
would be 6.5 %. What is the effective cost of funds?
Marks : 1
a. 8.234%
b. 9.215%
c. 4.867%
d. 5.217%
e. None of the above.

Working :

4.5 + 0.05
Effective cost of funds =
0.935

= 4.867%

7. Suppose the spot rate between AUD and USD is 0.7500 USD per AUD. This is
denoted as AUD/USD. The 90-day forward is 0.7530 U.S dollars can be lent or
borrowed at a rate of 4.5% p.a, while the rates for AUD deposits or loans is 4 % p.a.
How much risk-less profit can you make on a borrowing of 100 USD.
Marks : 2
a. USD 0.2765
b. USD 1.2140
c. USD 0.2305
 9

d. USD 2.2350
e. None of the above

Working :

Spot 90 – day forward

AUD/USD 0.7500 0.7530

Borrow 100 USD and convert it into AUD 133.33

Invest AUD 133.33 @ 4 % p.a for 90 days and get 133.33 [1 + 0.04(90/360)]
= AUD 134.6633

Convert AUD into USD at the forward rate and receive dollars
AUD 134.6633 x 0.7530 = $ 101.4015
Repay USD by paying 100 [ 1 + 0.045 ( 90/360) ]
= $ 101.125
Riskless profit = $ 101.4015 - $ 101.1250
= 0.2765

8. Epcot Ltd has a short- term fund surplus of 90 million. The funds can be parked for a
six month period. The company observes the following rates in the market.
Eurodollar 6 month LIBOR : 4% p.a
USD/INR spot : 46.20/46.30
USD/INR 6 month forward : 46.40/46.50
If Epcot Ltd parks its funds in the U.S dollar, What return will it finally get over the
6-month period, if covered forward?
Marks : 2
a. 1.562%
b. 2.923%
c. 3.200%
d. 2.220%
e. None of the above.

Working :

90,000,000
Amount deposited in USD = = $ 1,943,844.49
46.30

Maturity value of the USD = 1,943,844.49 [1 + 0.04 (180/360) ]

= $ 1,982,721.38

Rupee equivalent at the forward rate of 46.40 per USD

= $ 1,982,721.38 x 46.40
= Rs. 91,998,272.03

Rupee rate of return = 2.22%

 10

9. At the end of year 2003 we have the following data for a country.
WPI in the home country = 100
Exchange Rate FC/HC = 50 (i.e 50 units of home currency per
unit of foreign currency)
WPI in the foreign country = 100

At the end of year 2004 we have

WPI in the home country = 110
Exchange rate FC/HC = 44
WPI in the foreign country = 102

By how much has the home currency depreciated or appreciated in real terms ?
Marks : 2
a. Appreciated by 18.4%
b. Depreciated by 19.6%
c. Appreciated by 14.2%
d. Depreciated by 20.6%
e. None of the above
Working :

102
44 x = 40.8
110

Thus the H.C has appreciated by 18.4%.

10. Money and foreign exchange markets in New York and Frankfurt are very efficient.
You have the following information:

Frankfurt New York

Spot exchange rate USD 1.181/EUR EUR 0.847/USD

1-year T-bill rate 5% 5.5%

The expected inflation rate in the U.S is 3% p.a. If the PPP holds, what is the expected
inflation rate in Frankfurt?
Marks : 2

a. 3.7%
b. 4.8%
c. 2.6%
d. 2.5%
e. None of the above
 11

Working :
One year forward rate would be :
S [ (1 + iUS ) / (1 + IEUR)]
= 1.181 [ (1 + 0.055) / ( 1 + 0.05)]
= USD 1.1867/£

If the parity condition holds as assumed, the forward rate is the expected spot rate one
year later. Then using the PPP, the estimated inflation in Frankfurt is

F 1 + ih
=
S0 1 + if

1.1867 1 + 0.03
=
1.1810 1 + if

1.1810 x 1.03
1 + if = = 1.025
1.1867

if = 2.5 %

11. A New York dealer quotes :

USD/GBP Spot : 0.5700/10
USD/JPY Spot : 120.71/80
What will be the GBP/JPY rate in London?
Marks : 2
a. 214.1000/214.1010
b. 220.8290/220.8295
c. 211.4011/211.9298
d. 212.4811/212.4911
e. None of the above.
 12

Working :

( GBP/JPY)bid = (GBP / USD )bid x (USD / JPY)bid

1
= x (USD / JPY)bid
(USD / GBP)ask
1
= x 120.71 = 211.4011
0.5710
(GBP / JPY)ask = (GBP / USD)ask x (USD / JPY)ask

1
= x (USD / JPY)ask
(USD / GBP )bid

1
= x 120.80 = 211.9298
0.5700

GBP / JPY = 211.4011 / 211.9298

12. The following quotes are seen on the screen : USD/CHF spot 1.3032/42 182 – day
swap : 10/15.
(i) What is the outright rate USD/CHF 182- day ?
Marks : 1
a. 1.3042/1.3057
b. 1.2650/1.2660
c. 1.9420/1.9435
d. 1.3040/1.3050
e. None of the above
Working :

Swap points are low / high. So, add swap points to spot rate
182 – day out right is 1.3042 / 1.3057
 13

(ii) What is the annualised premium on USD ?

Marks : 1
a. 0.2033%
b. 0.1925%
c. 0.1897%
d. 0.1920%
e. None of the above

Working :

Using mid rates the annualized premium is :

forward ( USD / CHF )mid = ( 1.3042 + 1.3057) / 2 = 1.30495

spot ( USD / CHF )mid = (1.3032 + 1.3042) / 2 = 1.3037

Annualised forward premium on the dollar is :

1.30495 – 1.3037 360
x x 100 = 0.1897%
1.3037 182

13. A foreign exchange dealer in London normally quotes spot, one-month and three-month
forward. When you ask over the telephone for current quotations for the Japanese Yen
against the US dollar, you hear
121.80/90, 30/35, 50/55
(i) What would you receive in dollars if you sold Yen 20,000,000 spot?
Marks : 1
a. $ 200,234.20
b. $ 190,187.20
c. $ 164,068.91
d. $ 140,121.85
e. None of the above

Working:
20,000,000
= $ 164,068.91
121.90

(ii) What would it cost you to purchase JPY 30,000,000 forward three-months with
dollars ?
Marks: 1
a. $ 245,298.45
b. $ 295,245.98
c. $ 300,240.50
d. $ 120,140.90
 14

e. None of the above

Working :

Three months outright = ( 121.80 + 0.50 ) / ( 121.90 + 0.55 )

= 122.30 / 122.45

30,000,000
= = $ 245,298.45
122.30

14. Suppose an Indian firm has a 3-month payable of JPY 70 million. The market rates
are as follows:
Mumbai USD/INR Spot : 44.50/60
3-months : 45.50/60
Singapore USD/JPY Spot : 120.20/30
3-months : 120.10/20

If the firm buys JPY forward against INR, how much will it have to pay?
Marks : 2
a. Rs. 27,892,950.35
b. Rs. 20,200,300.40
c. Rs. 10,400,900.30
d. Rs. 26,577,851.93
e. None of the above
Working :
70,000,000
USD required = = USD 582847.63
120.10

Rupees required = USD 582847.63 x 45.60

= Rs. 26,577,851.93

15. An American firm has EUR 60 million 180-day payable. The market rates are :
EUR/USD spot : 1.1485/95 180-day swap : 30/40
EUR interest rate : 3.00/3.10 USD interest rate : 4.00 / 4.10
(i) How much will it have to pay if it covers the payable forward ?
Marks: 1
a. $ 69.21 million
b. $ 70.25 million
c. $ 80.50 million
d. $ 40.50 million
e. None of the above
 15

Working :

180 – day outright rate

= ( 1.1485 + 0.0030 ) / ( 1.1495 + 0.0040 )
= 1.1515 / 1.1535
If the firm covers the payable forward, it will have to pay
= 60 x 1.1535 = $ 69.21million

(ii) What will be the outflow if it covers via the money market?
Marks : 2
a. $ 69.3437 million
b. $ 70.3030 million
c. $ 60.8450 million
d. $ 50.2030 million
e. None of the above
Working :

60
Deposit = = EUR 59.1133
1.015

Buy 59.1133 EUR by borrowing 59.1133 x 1.1495 = USD 67.9507

Outflow associated 6 months hence = 67.9507 x 1.0205

= USD 69.3437 million.

16. A firm plans to borrow £ 70,000,000,for 3 months starting 6 months from now. The
current 3-month Euro sterling rates are 4.5-5%. The firm has to pay a spread of 50 bp
over LIBOR. The treasurer is apprehensive about the possibility of the rate rising over
the coming 6 months. Sterling 6/9 FRA is being offered at 5.25%. The treasurer decides
to buy it. The anticipated borrowing is for 91 days. 6 months later, the sterling
settlement LIBOR is 5.50%. How much will the bank pay the firm?
Marks : 2
a. £ 50,920.90
b. £ 30,300.20
c. £ 20,200.50
d. £ 43,040.49
e. None of the above.
 16

Working :

Contract rate = 5.25% Settlement rates = 5.5%

(0.055 – 0.0525) ( 70,000,000 ) ( 91 / 365 )

A =
[1 + 0.0550 ( 91 / 365 )]

43630.14
= = £ 43,040.49
1.0137

17. A corporate treasurer has a 90-day cash surplus of $ 60,000. He wants to invest in
AAA rated CPs which pay 6% p.a. The denomination of the CP is $100,000. He can
borrow from his bank at 6.5 % p.a for 90 days; the bank will pay him 5.5% p.a for
90-day deposit. What is the break-even size of excess (surplus) funds?
Marks : 1
a. $ 60,000
b. $ 50,000
c. $ 70,000
d. $ 90,000
e. None of the above

Working :

m ( b – i)
S* =
b-d

100,000 ( 0.065 – 0.06 )

= = 50,000
( 0.065 – 0.055 )

18. A U.S Exporter to U.K has 90day Sterling receivable. He purchases a put option on
£ 300,000 at a strike price of USD 1.1460/GBP at a premium of USD 0.10 per pound.
The current spot rate is USD 1.1470/GBP. The interest opportunity cost for the firm is
6% p.a. What is the maximum USD/GBP rate at the end of 90 days below which the
firm will make a net gain from the put.
Marks : 2
a. 1.0445
b. 1.1010
c. 1.2155
d. 1.8125
e. None of the above
 17

Working :

Sell £ 300,000 @ $ 1.1460 / GBP and receive

300,000 x 1.1460 = $ 343,800

30,000
Premium paid @ $ 0.10 per pound =
313,800
Net proceeds
Opportunity cost on premium @ 6% p.a for 90 days.

30,000 x 0.06 x 90 / 360 = 450

Net proceeds 313,350

∴ The maximum exchange rate below 313,350

which the firm makes a net gain from = = 1.0445
the put option 300,000

‘OR’
= 0.1470 + premium + interest on premium
= 0.1470 + 0.10 + 0.10 x 0.06 x 90 / 360
1.0455

19. As a swap banker, you are approached by client A who has to fund itself in fixed rate
EUR though it prefers floating rate USD funding. Its funding cost in EUR is 4.50%
while it is willing to pay floating at six-month LIBOR plus 50 bp. You have another
client B which has easy access to floating rate USD market at Sub-LIBOR cost of
LIBOR-50 bp. It would like EUR funding at no more than 4% to acquire some EUR
fixed rate assets.
Show how the swap can be executed. Assume that swap bank incurs savings in one
currency and an additional payment obligation in another currency.
Marks : 7
 18

Working :

SWAP
BANK
$ LIBOR +50bp $ LIBOR – 50bp

4.5% 4%
EUR Fixed EUR Fixed

EUR Principal at start

Client Client
A B
USD Principal at start

USD Principal at end

4.50% to EUR lenders EUR Principal at end $ LIBOR- 50bp lenders

 19

PART C : MINICASE

Varma and company are wholesalers in imported fruits in Pune. In the last couple of years
their business had recorded phenomenal growth thanks to the changing lifestyles of the
growing middle class. This had led to sourcing of materials from other than the traditional
markets abroad. Though everything was going fine for him , Dinanath Varma , the
proprietor, was facing an awkward problem. He was finding it difficult to comprehend the
increasing complexity and uncertainty of the foreign exchange markets .In such a situation
when his son Sunil who had just completed his business management course, expressed a
desire to join the family business it was indeed a very pleasant surprise for him. Promptly
he converted the firm into a private limited company and delegated all treasury and
planning work to him.
The businessmen in this trade at that place had no habit of booking any forward contracts
for their imports . Also, an appreciating rupee had made decision making rather easy for
them. Sunil was shrewd to foresee that the party could not last long and had made a radical
decision to cover fifty percent of all payables forward.
On 29th November he has the following immediate tasks on hand:
1) A payable of USD 100,000 , due on 30th November has got postponed due to
delay in shipment. The revised due date is 15th February next year(not a leap
year). Fifty percent of this payable had been covered forward at the rate 45.50.
2) A GBP deposit will be maturing at the bank on 30st November. In fact he had
planned to use the maturity proceeds amounting to GBP 80,000 to meet the
above payable.
3) A fresh order valued AUD 100,000 has to be placed with an Australian supplier
for delivery of goods in January next year - necessitated by the delay in the bulk
import. This supplier necessarily demands an immediate advance payment in
AUD for 30% of the contract value . Also as part of the policy fifty percent of
the payable has to be covered forward.
4) The following rates are available to him on 29th November from his bank.
Spot swap points 1 month 2 months 3 months

USD/INR 45.65/70 5/6 10/14 15/20

GBP/INR 79.10/15 7/9 12/15 16/20
AUD/INR 33.15/20 10/7 12/10 14/11

You are required to answer the following questions on behalf of Sunil Varma.
a) How to roll over the forward cover to 15th February next year? What is the outright
forward rate that can be expected from the bank and assuming a forecasted spot rate
of 46.10, what will be the payable in rupees on that date?
b) How much out of the matured GBP deposit will be needed to send the advance
payment of AUD 30,000 to the Australian supplier? Use cross rates and assume that
no rates other than what has been obtained from the bank will be used.
c) The balance of the GBP deposit maturity proceeds can be renewed either in the
same currency or in rupees depending on the interest rates. You have ruled out a
USD deposit as fifty percent of the USD payable has already been covered by the
 20

swap. The bank has quoted an interest rate of 2 percent per annum for a 77 days
GBP deposit and 6percent per annum for a deposit in rupees( which is convertible).
While the rupee deposit rate is non- negotiable, the bank has indicated that it could
be more flexible on the GBP interest rate. What is the minimum GBP interest rate
that would be acceptable to you? (Use covered interest arbitrage method)
d) What forward rate can be expected from the bank for the remaining AUD payable
of 70,000 in January next year, on an option forward basis?
Marks : 18
Working :

On 29th November sell USD 50,000 spot at 45.65 and buy forward for delivery on 15th
February next year. The bank would arrive at the forward rate as under.
Premium till January 14
for February 3.21 [ (20-14)/28 x 15 ]
--------
total 17.21
-------
Adding this to the spot ask rate, the forward rate would be 45.87
The total rupees payable on 15th February would be 50,000( 45.87+ 46.10)=Rs.45,98,500

b) The cross rate AUD/GBP = AUD/INR x INR/GBP

= (33.15/79.15) / ( 33.20/79.10)= 0.4188/0.4197
To purchase AUD 30,000 , the GBP needed is 30,000 x 0.4197 = GBP 12,591

c) Balance GBP available for deposit = 80,000 – 12,591 = 67,409

If this is converted to rupees spot and deposited for 77 days @ 6percent p.a. the
maturity value will be = 67,409 x 79.10x [1+ (0.06x77)/365] = Rs.5,400,249.59
The forward rate for 15th Feb is calculated as follows:

Premium on GBP till January = 15

for February = 2.68 [ (20-15)/28 x 15 ]
total = 17.68

The forward rate = 79.15 + 0.1768 = 79.33

If the rupee maturity value is converted at this forward rate to GBP we get
5,400,249.59/ 79.33 = GBP 68,073.23
If this were to be the maturity value of a deposit of GBP 67,409 for 77 days, the
rate of interest implied is (68,073.23– 67,409) / 67,409 x 365/77 x 100 = 4.67 %

Therefore the minimum interest rate acceptable for GBP deposit is 4.67 % p.a. If the bank
does not agree for this it is advisable to make a rupee deposit.

d) As the AUD is at a discount the bank will give minimum discount for the
month of January for selling and so will apply the ask rate for December end
viz. 33.13.
 21

PART D : THEORY

Answer any one of the following three questions. The answer must be
approximately 400 words. It must be written in the space provided. Devote adequate
time and frame your answer carefully, as this question carries 30 marks

1. a. Discuss the options available to a firm for investing surplus cash in the
domestic market.
b. Explain the strategies for managing surplus funds.
2. Explain the structure of a typical GDR issue. What are the pros and cons of a
GDR issue?
3. Describe the features of ( a ) interest rate swaps and ( b ) currency swaps.
Marks : 30
22