Question 01. EXCHANGE ARITHMETICS: PRACTICAL EXAMPLES You have received a Swift advice from your Middle East correspondent stating that: it has placed to the credit of your account with your New York correspondent a sum of US$ 500, 000 and requesting you to credit equivalent value in Rupees to their Rupee account with you. Interbank Rates in Mumbai are 61.4250/61.4350. What rate would you apply and what Rupee equivalent would you credit to the account of the Middle East correspondent with you? It is a purchase of USD from the Middle East correspondent. The proceeds of Rupees have to be credited to their Rupee account. Since this is an interbank transaction, no separate margin is loaded on the rates and it is assumed that the rates quoted include the profit margin also. The applicable rate for sale of Rupees (for buying dollars) is Rs. 61.4250. For US$ 500,000 @ Rs. 61.4250 the Rupee equivalent would be Rs. 3,07,12,500/- Question 02. Your exporter customer an Export Oriented Unit, has presented to you sight documents for US$100,000 for negotiation under a letter of credit providing for value date TT reimbursement. The exchange rates are: Interbank US$ 1 = Rs. 61.2500/61.2600 Your customer requests the following a. To retain 50% of bill in their EEFC account with you. b. To pay a commission of 0.5% to the Indian agent as mentioned in the letter of credit. Calculate the Rupee amount to be credited to the customer s current account taking into consideration: 1. An exchange magin of 0.15% is required by you. 2. Exchange rates to be quoted in two decimals. 3. Rupee amount to be expressed to the nearest Rupee. Bill amount US$100,000. The customer requested to retain up to 50% of their export receivables in their EEFC account in foreign currency. Therefore EEFC account credit 50% of US$ 100,000 = US$50,000 Balance of US$ 50,000 at bill buying rate Spot rate US$ 1 = 61.2500 Less Margin 0.15% = 0.0919 --- 61.1581 --- Rounded off to two decimals = 61.16 US$ 50,000 @ Rs. 61.16 = Rs. 30,58,500/- Less Commission payable to Indian agent on the bill Amount US$ 100,000 @ 0.5% US$ 500 @ Rs. 61.16 = Rs. 30.580 Rs. 30,27,420 1
Balance amount credited to customer s current account Question 03. On 30 th April 2014 when a forward contract matured for execution you are asked by an importer customer to extend the validity of the forward sale contract for US$ 10,000 for a further period of three months. Contracted Rate US$ 1 = Rs. 61.8700 The US Dollar quoted on 30.04.2014 Cash 60.4800/60.4900 Premium May 0.2200/0.2400 Premium June 0.4500/0.4650 Premium July 0.6750/0.6850 Calculated the cost for your customer in respect of the extension of the forward contract. Rupee values to be rounded off to the nearest Rupee. Margin 0.080% for Buying Rate Margin 0.25% for Selling Rate Extension of foreword contract This is a sale contract. Steps are: 1. Cancel the contract at TT buying rate 2. Rebook the contract for three months at the current rate of exchange Step 1: Cancel the contract at TT buying rate on 30.04.2014 Cash US$ 1 = 60.4800 Less Margin0.080% = 0.0483 -- 60.4317 -- Hence TT buying rate Rs. 60.43 (Rounded off). US$ 10,000 @ Rs. 60.43 = Rs. 6,04,300 US$ 10,000 @ Rs. 61.87 = Rs. 6,18,700 Difference in favour of the bank Rs. 14,400 Step 2: New contract to be booked at the appropriate forward rate Three months forward rate is as under US$ 1 = Rs. 60.4900 Cash Selling Add July Premium = 0.6350 --- 61.1750 --- Add margin 0.25% = 0.1529 ---- Rs. 61.3279 ---- 2
Forward rate to be quoted to the customer is US$ 1 = Rs. 61.33 Question 04 You sold Euro 1 million value spot to your customer at Euro 1 = Rs. 80.28 and covered yourself in Singapore market on the same day when the exchange rate was as under: Spot EURO 1 = USD 1.3080/1.3083 Local interbank US$ 1 = Rs. 61.4200/61.4300 (Brokerage paid Rs. 2000) Calculate the cover rate nearest to the fourth decimal and ascertain profit of loss in the transaction to the nearest Rupee. Our cost of 1 million Euro Gross Rate 61.4300*1.3083 = 80.3689 1 Million Euro @ 80.3689 = Rs. 8,03,68,900 Add Borkerage = Rs. 2,000 Proceeds of Sale to Customer -- Rs. 8,03,70,900 @ Rs. 80.28 = Rs. 8,02,80,000 --- Loss = Rs. 90,900 Question 05 On 11.04.2014 the ruling rate were: Interbank Rs. 61.4000/61.4100 --- You have been authorised to retain margin of 0.080% for a transaction involving inward remittance of US$ 100,000 value spot. In Rupee terms how much will your customer get and what is the effective exchange rate? Spot buying rate = Rs. 61.4000 Less Margin 0.080% = 0.0491 -- Rs. 61.3509 -- Hence US$ 100,000 = Rs. 61,35,000/- Question 06 Or Say = Rs. 61.35 --- On 02.01.2014 you had purchased a demand bill for US$ 10,000 @ Rs. 62.03 and the exporter was paid in Rupees immediately. The bill when presented on 10.01.2014 at Chicago was not honoured. The advice of non-payment was received and conveyed to the exporter on 13.01.2014. the exporter requested that 1. the bill amount plus charges (Rs. 250) be recovered from him 2. the bill be treated on collection basis and represented for payment 3
3. 5% rebate be allowed to the overseas importer. On 03.02.2014 the bank in Chicago telexed having recovered and credited the proceeds less their charges US$ 20 with value date on 03.02.2014. Meanwhile the market had moved and the TT selling rate on 13.01.2014 was Rs. 62.07 The TT buying rate on 03.02.2014 was Rs. 61.81 The repayment of the bill means reversal of the deal and hence the bank has to sell ready dollars at the TT selling rate on the date of reversal of the transaction. In this process we have to find out what would be the probable Rupee loss or profit to the customer On the 13.01.20114 the customer pays to the bank, the bill amount (overdue interest is ignored in our calculation and separately recovered). The following amount would be paid. Bill amount US$ 10,000 TT Selling rate Rs. 62.07 Rupee amount payable by the customer = Rs. 6,20,700 Charges + 250 ---- Rs. 6,20,950 ---- On the export bill realised on 03.02.2014, the dollar proceeds realised would be Bill Amount US$ = 10,000 Less 5% rebate = 500 Less Bank Charges = 20 Actual Realised US$ = 9480 The dollar amount at the TT buying rate of Rs. 61.81 would be US$ 9480 x 61.81 = Rs. 5,85,959 Gain or loss to the customer Amount refunded by the customer On 13.01.2014 = Rs. 6,20,950 Amount Received by the customer On 03.02.2014 = Rs. 5,85,959 Loss = Rs. 34,991 Question 07 A customer offers you a sight bill for US$ 20,000 on 01.03.2014 under a letter of credit established in his favour by an American Bank. Assuming the following what Rupee amount will you credit to his account? Interbank US$ 1 = 60.7800/60.7900 Transit Period 25 days; Exchange margin 0.150% Sight bill for US$ 20,000 Interest @ 9% per annum Interbank US$ buying rate = Rs. 60.7800 Less 0.150% margin = 0.0911 4
Rounded off to 60.69 US$ 20,000 @ Rs. 60.69 Rs. 60.6889 A. Amount payable to the customer = Rs. 12,13,800 B. Interest @ 9% for 25 days = Rs. 7,482 Net Amount = Rs. 12,05,318 Question 08 An importer customer approached you on 02.01.2014 for sales to him: 1. US$ 100,000 delivery 31-03-2014 2. US$ 200,000 delivery 30-04-2014 Assumption 1. Spot Interbank 61.9900/62.0000 Forward prema January 0.2400/0.2600 2. Exchange margin 0.125% February 0.4850/0.5000 March 0.7300/0.7500 April 0.9900/1.0000 Calculate the rates to be quoted to the customers, in two decimals An importer customer approached on 02.01.2014 1. US$ 100,000 delivery 31.03.2014 Spot interbank rate = 62.00 Add premium up to 31.03.2014 = 0.75 ------- 62.75 Add exchange margin 0.125% = 0.08 62.83 2. US$ 200,000 delivery 30.04.2014 Spot interbank rate = 62.0000 Add premium up to 30.04.2014 = 1.0000 63.0000 Add: Exchange margin 0.125% = 0.0787 63.0787 Rounded off to Rs. 63.08 5
Question 08 Your customer requests you to book a sale forward exchange contract for US$ 10,000 delivery 3 rd month. Assuming US dollar is quoted in the local interbank market as under Spot US$ 1 = Rs. 61.4800/61.4900 One month forward premium 0.2500/0.2600 Two months forward premium 0.5100/0.5250 Three months forward premium 0.7700/0.7900 What rate will you quote to your customer bearing in mind you are required to make an exchange profit of 0.15% on the transaction. What will be your profit? NB 1. Exchange profit must be included in the rate quoted to the customer 2. Rate quoted should be in two decimals 3. Ignore brokerage and telex charges. Interbank spot selling rate (our buying) Rs. 61.4900 Add: Three months forward premium 0.7900 Rs. 62.2800 Add: Exchange profit 0.15% 0.0934 Rs. 62.3734 Rounded off to Rs. 62.37 Profit on the transaction Rate quoted to the customer Rs. 62.37 US$ 10,000 @ Rs. 62.37 Rs. 6,23,700 Less: US$ 10,000@ 62.28 Rs. 6,22,800 Bank s Profit Rs. 900 Question 10 You had sold Pound Sterling 100,000 in the interbank market at Pd Stg 1 = Rs. 101.08 in cover of an inward TT reported by your branch in India. However, it was detected that the transaction had been erroneously reported twice and you are, therefore, required to cancel your sale. Assuming that Sterling was quoted in the local interbank market as under. Spot TT Pd Stg 1 = Rs. 101.08/101.11 One month forward = Rs. 101.20/101.24 What will be the loss or gain to the bank bearing in mind that you are required to pay brokerage Rs. 2000/- for original sale transaction as well cancellation transaction. This involves cancellation of our Pd Stg 100,000 as the interbank market 1. As the sale has to be cancelled we will have to buy train the market at interbank selling rate Pd Stg 1 = Rs. 101.11 6
Pd Stg 100,000 @ 101.11 Rs. 101,11,000 Add Brokerage Rs. 2000 - Rs. 101,13,000-2. Amount originally received for our sale Pd Stg 100,000 @ 101.07 Rs. 101,07,000 Less Brokerage Rs. 2000 - Rs. 101,05,000 - As we have paid out more than what we have received we incur a loss of Rs. 101,13,000 minus 1,01,05,000 = Rs. 8000/- Question 11 Your forex dealer had entered into a cross currency deal in the interbank market and bought Euro 500,000 at Euro 1 = US$ 1.3129 for spot delivery. However, the market turned volatile and therefore he squared up his position by disposing of Euro against US dollar at the ongoing market rates. Assuming Euro were quoted in the market as under: Spot Euro 1 = US$ 1.3101/1.3103 If spot US$ 1 = Rs. 61.79/61.81 in the local interbank market what will be the gain or loss in the transaction? 1. For our purchase of Euro 500,000 we had paid out US$ 6,56,450 (500,000 x 1.3129) 2. But we have now to sell Euro 500,000 at US$ 1.3101 and receive only US$ 6,55,050 3. So we incur a loss of (1 minus 2) US$ 1,400 which will have to be bought at the interbank selling rate of US$ 1 = Rs. 61.81 Therefore the loss works out to Rs. 86.534 Question 12 On 16 th April 2014, an exporter booked a forward purchase contract for USD 1,00,000 for July 2014. The contact is booked @ USD 1 = Rs. 61.00 The customer approached in May 2014 and requested for early delivery of contract. The spot rate on that day is USD 1 = Rs. 65.00 The forward premium rate 1 month is Rs. 0.40 Interest on outlay of funds should be charged @ 10% p.a Interest on inflow of funds is to be paid @ 4% p.a Administrative charge is NIL Please calculate the amount, the customer would receive? Solutions As contract is utilized 1 month before, premium for month of Rs. 0.40 per US$ has be recovered. The customer would be paid @ Rs. (61.00-0.40) = Rs. 60.60 Thus the customer will be paid US$ 1,00,000 x Rs. 80.60 = Rs. 60,60,000.00 (1) The bank would nationally get Rs. 65.00 on selling the said amount of US$ 1,00,000 Therefore the bank will get US$ 1,00,000 x Rs. 65.00 = Rs. 65,00,000.00 7
Amount Paid = Rs. 60,60,000 Amount Received = Rs. 65,00,000 Therefore inflow = Rs. 4,40,000 The interest at 4% for 1 month would be Rs. 1447.00 (11) As worked out above in (1) & (11) above The exporter will receive Rs. 60,60,000 + 1447 = Rs. 60,61,447 Question 13 Cancellation before maturity On 7 th May 2014, an exporter booked a forward contract for delivery in August 2014 for USD 1,00,000 @ USD = Rs. 62.00. However, client requesting to cancel the same in the month of June 2014. If the 2 months forward selling rate on the date of cancellation is Rs. 60.00, what will be loss/gain for the customer? USD 1,00,000 @ Rs. 62.00 we pay = Rs. 62,00,000.00 (Original Contract) USD 1,00,000 @ Rs. 60.00 we recover = Rs. 60,00,000.00 -------------- Gain for Customer Rs. 2,00,000.00 -------------- Question 14 Rollover / Extension An importer has booked forward sale contract on 5 th April 2014 for USD 1,00,000 @ USD 1 Rs. 62.00 delivery in June 2014. During the month of June 2014 the client seeks extension up to July 2014. This necessitates cancellation of the contract at the TT Buying rate ruling on the due date and re-booking of the contract at the current rate of exchange simultaneously. the current Tt Buying rate is UDS 1 Rs. 60.00 and current forward selling rate be July is USD 1 Rs. 60.60. What will be lose/gain and new contract rate for the customer? USD 1,00,000 @ USD 1 = Rs. 62.00 = Rs. 62,00,000 (Original Contract Rate) USD 1,00,000 @ USD 1 = Rs. 60.00 = Rs. 60,00,000 (TT Selling rate on date of cancellation) --- Rs. 2,00,000 Now we have cancelled the original contract, a new contract has to be re-booked @ USD 1 = Rs. 60.60 in month of July 2014. Hence the customer would have to pay (Rs. 60,60,000.00) + Rs. 2,00,000.00 i.e Rs. 62,60,000.00 for delivery in July 2014 Thus, effectively the customer pays additional amount of Rs. 50,000 for extension of the contract by one month. 8