Exchange Arithmetic problems

Calculation of Cross Rates

1. If exchange rates in the Mumbai Interbank market and London are as follows:
Mumbai rate 1US$ = s.!".#""$%#&"$
London rate 1'()*) = US$ 1.!"#$%#+
,t what rate can an im-orter bu. '() against u-ees
Sol: /ow man. s. = 1 '()*)
If 1 '()*) = US$ 1.!"#+
,nd if 1 US$ = s. !".#&"$
Therefore 1 GBP() 1!"#$%&"#!$'#( Rs! '#!%#'#
#. If rates in London Market are
1 0 = US$ 1.#+&%1$
,t what rate can one bu. 0 against u-ees2
Sol: /ow man. s. = 1 0
If 1 0 = US$ 1.#1$
,nd if 1 US$ = !".#&"$
3herefore 1 0 = !".#&"$ 4 1.#1$ = s. "+.565#
6. If rates in 7ew 8ork Market are as follows:
1 US$ = 9an $ 1.#6"$ % !"$
/ow man. s. will an ex-orter recei:e against recei-t of 1 million 9an $
Sol. /ow man. s. = 1 9an$
If 1.#!"$ 9an$ = 1 US$
,nd if 1 Us$ = s. !".#""$
Since 1.#!"$ = !".#""$
3herefore 1 9an$ = !".#""$ % 1.#!"$ = s. 6&.6!5!
3herefore the ex-orter will get 6&.6!5! 4 1;$$$;$$$ = S. 6;&6;!5;!$$ %<
!. London market rate
*) %$ = 1.&##" % 6"
$ % = = 1#!.1$ % #$
,U> % $ = .&++$ % 1$
Mumbai interbank rate
US$ 1 = !$.16#" % 1&"$
a? ,t what rate can .ou bu. against the $
b? Market will sell US$ against ,U>
c? 8ou can bu. against =
d? Market will sell against s.
e? 8ou can bu. against ,U>
Calculation of )or*ar+ Rates
1. If following is the exchange rate scenario; what will be the US$% 9,7$ forward rates2
S-ot Us$1 = 9,7$ 1.1#6"%1#!"
@orwards S-ot % 1 month 1+%11
S-ot % # month 6"%6+
S-ot % 6 month "6%"&
S-ot % & month 55%1$&
Sol: (ase 9urrenc. US $ is at -remium as the forward rates are in ascending order
with the first rate lower than the second. 3herefore premium has to be a++e+.
If one has to bu. US $ forward the rates will be com-uted as follows:
Autright 1 month bid *bu.ing? rate will be
S-ot US $ 1 = 1.1#6"
,dd -remium for 1 month $$1+
9,7$ 1.1#"#
*Since market is bu.ing US$ will gi:e less 9,7$ and will add less -remium?
Autright 1 month offer *selling? rate will be
S-ot US $ 1 =1.1#!"
,dd -remium for 1 month $$11
9,7$ 1.1#&6
*Since market is selling US $ it will take more 9,7$ and will add more -remium?
3he forward Buote will be US>$ 1 = 1.1#"#%&6
S-read = 11 i.e. S-read in s-ot rates C forward differential 1$C1
Similarl. the 6 month forward rate =
S-ot US $ 1 = 1.1#6"
,dd -remium for 6 months $$"6
9,7$ 1.1#11
S-ot US $ 1 =1.1#!"
,dd -remium for 1 month $$"&
9,7$ 1.16$1
3he 6 month forward rate = US$ 1 = 1.1#11D6$1
,n ,n+ia there is a slight +ifference as for*ar+ +ifferentials are -uote+ for the last
+a. of the month
#. If the following is the exchange rate scenario; what will be the US $ % u-ee forward
bid and offer rates
S-ot Us$1 = s. !#.16#"%1&"$
@orwards S-ot % March 1+$$%11$$
S-ot % ,-ril 6"$$%6+$$
S-ot % Ma. "6$$%"&$$
S-ot % Eune +1$$%+"$$
S-ot % Eul. 15$$%5!$$
S-ot % ,ugust 1.$+$$%1.16$$
Autright forward 6 months bid rate is
S-ot US $ 1 = !#.16#"
,dd -remium for 6 months i.e Ma. 61st ."6$$
s. !6.6&#"
Autright forward 6 months offer rate is
S-ot US $ 1 = !#.1!#"
,dd -remium for 6 months i.e Ma. 61st ."&$$
s. !6.!#"$
6.Let us Buote another market scenario of exchange rates Buoted in the market as under
S-ot F 1 = US$ 1.&#1!%&#51
@orwards S-ot % 1 month 1&%1"
S-ot % # month 6!%6#
S-ot % 6 month "6%"$
S-ot % & month 51%51
/ere the F is at a +iscount an+ hence *ill ha/e to be +e+ucte+ while arri:ing at the
forward rates
0ne month for*ar+ offer rate *ill be calculate+ as follo*s1
S-ot F 1= 1.&#51
Less >iscount for one month 1"
US$ 1.&#+&
*Market is taking US$ hence will take more and the lower of the two figures will be
deducted?
0ne month for*ar+ bi+ rate *ill be calculate+ as follo*s1
S-ot F 1= 1.&#1!
Less >iscount for one month 1&
US$ 1.&#&1
*Market is gi:ing US$ hence will gi:e less and the higher of the two figures will be
deducted?
!. Let us consider another scenario as on Ma. 1
st
; Mumbai interbank market Buotes
as follows:
S-ot Us$1 = s. !$.###"%#"+"
@orward S-ot % Ma. #"$$%#6$$
S-ot % Eune "#$$%!5$$
S-ot % Eul. ++$$%+#$$
Sol:
Us $ is base currenc. and it is at a discount which will ha:e to deducted
Autright forward Ma. interbank bid rate is
S-ot US $ 1 = !$.###"
Less discount for Ma. .#"$$
s. 65.5+#"
*Market for bu.ing US$ will gi:e less s. and will deduct more discount?
Autright forward Ma. interbank offer rate is
S-ot US $ 1 = !$.#"+"
Less discount for Ma. .#6$$
s. !$.$#+"
*Market for selling US$ will take more s. and will deduct less discount?
It ma. be noted that these rates are for the last da. of the month
Similar rates ma. be worked out for Eune and Eul. on the same lines
)or*ar+ Cross Exchange Rates
". Su--ose M% S (rit and 9o wants to bu. '() against 9,7$ 6 months forward; the
market is Buoting as follows:
S-ot Us$1 = 9,7$ 1.1#6"%1#!"
@orwards S-ot % 1 month 1+%11
S-ot % # month 6"%6+
S-ot % 6 month "6%"&
S-ot F 1 = US$ 1.&#1!%&#51
@orwards S-ot % 1 month 1&%1"
S-ot % # month 6!%6#
S-ot % 6 month "6%"$
S-ot % & month 51%51
Ghat will be the rate Buoted2
Ste-s to be taken
Ste- 1 Market takes 9,7$ from the 9A. and gi:es them US$
S-ot for US$ = 1.1#!"
,dd 6 month -remium .$$"&
9,7$ 1.16$1
Ste- 11Market gi:es US$1 6 month forward
Ste- 111 Market takes
S-ot for US$ = 1.&#51
Less 6 months discount .$$"$
US$ 1.&#!1
Ste- 1H Market gi:es '()1 6 months forward
3herefore 6 months forward rate will be
'()1 = US$ 1.&#!1 and 9,7$ 1.16$1
'()1 = 1.&#!141.16$1 = #.5+##
Exercise
Exchange rates
,s on March 1 I London Market
%$ $%9,7$ $%= ,U>%$
S-ot 1.&##"%6" 1.+1+"%1" 1#!.1$%#$ $.&++$%1$
1Month ##%#1 1&%1" "$%!1 1$%11
# Month !"%!6 66%61 1$#%1$1 #1%#6
6 Month &+%&! !5%!& 1"!%1"# 6#%6!
&Month 16"%16$ 55%5! #11%#$! &+%&5
Mumbai interbank Market
S-ot Us$1 = s. !#.16#"%1&"$
@orwards S-ot % March 1+$$%11$$
S-ot % ,-ril 6"$$%6+$$
S-ot % Ma. "6$$%"&$$
S-ot % Eune +1$$%+"$$
S-ot % Eul. 15$$%5!$$
S-ot % ,ugust 1.$+$$%1.16$$
,t what rate
1. 8ou can sell US $ against 9,7$ one month forward2
#. 8ou 9,7 bu. F against US$; 6 months forward2
6. Market will sell $ against ,U>; 6 months forward2
!. 8ou can sell F against =; # months forward2
". Market will sell F against s. ; # months forward 2
&. Market will sell s. against $ ; # months forward 2
+. 8ou can sell s. against =; 6 months forward2
1. 8ou can sell $ against =; & months forward2