FOREX RISK MANAGEMENT
BY CA. BHUPESH ANAND
FCA, ACMA, FCS, DIP-IFRS(LONDON)
CERTIFIED VALUER, MIND TRAINER
A.
FOREX ARITHMATIC
B.
FOREX RISK
C.
FOREX RISK MANAGEMENT
FOREX ARTHMATIC
DIRECT QUOTE
INDIRECT QUOTE
BANK RATE
SPOT RATE – FORWARD RATE
CROSS RATES
RULE (1)
RULE (2)
RULE (3)
RULE (4)
RATES
PREMIUM OF BASE CURRENCY
DISCOUNT OF BASE CURRENCY
THEORIES OF EXCHANGE RATE
INTEREST RATE PARITY THEORY
PURCHASING POWER PARITY THEORY
IRVING FISHER’S THEORY
ARBITRAGE
TWO POINT
GEOGRAPHICAL
THREE POINT
TIME
INTEREST RATES
DEPOSIT
BORROWING
RATES
RATE
LOWER - HIGHER
EXCHANGE MARGIN
RBI
RBI
BANK
BANK
EXPORTER
IMPORTER
TYPES OF FOREX RISK
TRANSACTION RISK
TRANSLATION RISK
ECONOMICAL RISK
POLITICAL RISK
HEDGING TOOLS
INTERNATIONAL HEDGING TOOLS
LEASING
LAGGING
NETTING
FOREIGN CURRENCY ACCOUNTS
HOME CURRENCY INVOICING
EXTERNAL HEDGING TOOLS
FORWARD CONTRACTS
FUTURE CONTRACTS
OPTION CONTRACTS
SWAP CONTRACTS
MONEY MKT. HEDGING
FORWARD CONTRACTS
FIXED DATE FORWARD CONTRACT
OPTIONS IN FORWARD CONTRACTS
OPTIONS IN FORWARD CONTRACTS
CANCELLATION
EXTENSION
EARLY DELIVERY
OPTIONS IN FORWARD CONTRACTS
DELTA ONE
CANCELLATION
EXTENSION
EARLY DELIVERY
Q-I
S.B.I. has booked a forward purchase contract for USD 1,00,000 due
14th March, 2003 @ Rs. 48.25. On maturity, the customer fails to
deliver the dollars and requests for cancellation of the contract. Spot
rate on 14th March,2003 USD = Rs. 48.6525/Rs. 48.7325. What amount
of gain/loss will be payable to/receivable from customer?
Q-2
A sum of £ GBP 73,500 is due from a sheffield customer on
March 1 Accordingly you arrange to enter into a forward contract
at Rs. 74.22 =1 £ you hear on February 27 that the payment will
be delayed by 2 months until May 1.The spot rate for march 1 Rs.
74.35 - 50 and that 2 months forward are quoted at Rs. 74.25 - 38
Determine, the cost if any of rollover.
Q-3
You are working for a bank,Your bank entered into forward contract with
the customer for purchase of US D 500,000 delivery 30 September; contract
rate Rs. 40.000. ON 1 July the customer approached the bank with delivery of
US D 500,000 which were delivered against the forward contract. On this
date the rates were as follows :
Spot
41.28 - 41.33
Forward 30 September
41.80 - 41.89
It accepts deposits for 3 months @ 8% per annum. What amount of
loss/gain will be receivable from/payable of customer?
Q-4
Consider the following INR/SGD direct quote of ICICI Mumbai : 26.50 - 26.75
(a) What is the cost of buying Rs. 55,000?
(b) How much would you receive by selling 92,000 rupees?
(c) What is the cost of buying SGD 7,450?
(d) What is your receipt if you sell SGD 18,340?
Q-5
The spot rate for € is Rs.50-52. the forward rate is 53-56. Compute swap
points, spot and forward spreads.
Q-6
Spot 1 $
= Rs. 46.00 / 46.10
1 month forward
= .10 /.11
2 month forward
= .12 / .13
3month forward
= .14 / .15
Calculate 1 month, 2 months and 3 months forward rates.
Q-7
The following information pertains to exchange rates quoted in London for spot and
forward.
Currency
Spot
Swap points
Swap points
1- months forward
3- months forward
Canadian dollar
1.8640 - 8650
40 - 30 c dis
0.90 - 80 dis
Euro
1.4468 - 72
10 - 20 c prem
45 - 55 prem
US $
1.5865 - 70
20 - 30 prem
25 - 35 prem
Calcualte the cost or value in sterling to customer, who wishes to
(a) Sell Canadian dollars 19,200 spot.
(b) Buy Euro 34,250 one month forward.
(c) Sell US $ 93,750 three months forward.
Q-8
The spot Danish Krone rate is $0.15986 and the three month forward rate is
$0.1590. The three month treasury bill rate in the United States is 6.25% p.a.
and in Denmark 7.50% p.a.
(i) Calculate forward premium or discount on Danish Krone.
(ii) Are the forward rates and interest rate in equilibrium?
(iii) Work out the forward rate if the forward premium or discount are not in
equilibrium.]
Q-9
Assuming no transaction costs, suppose £ 1 = $2.4110 in New York,$ 1 = FF3.
997 in Paris, and FF 1 = £ 0.1088 in London. How would you take profitable
advantage if you had £ 50.000?
Q-10
Management of an Indian company is contemplating to import a machine from USA at a
cost of US$ 15,000 at today’s spot rate of $ 0.0227272 per Rupee.
Finance manager opines that in the present foreign exchange market scenario, the
exchange rate may shoot up by 10% after two months and accordingly he proposes to
defer import of machine. Management thinks that deferring import of machine will cause
a loss of Rs.50,000 to the company in the coming two months.
THANK YOU