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Forex doubt

Dharmesh (Student CA Final ) (43 Points)

26 March 2014

Hello!

I have a doubt in the forex chapter. Could someone help me with the following sum:

An Indian company based at Mumbai needs short term funds of Rs 50 million for a perios of 3 month. The company collected the following info from its bank:

Spot: Rs/$ : 48.50/55

3 month forward: 45/50

Spot: Rs/GBP : 74.05/10

3 month forward: 85/90

3 month interest rates are:

Rs: 9%

$:4%

GBP: 6%

You are required to calculate the annualized effective cost of borrowing if

a) the company borrows in $ and covers the exchange rate risk through forward market. o

b) keeps the position open and the spot rate after 3 months turns out to be Rs/$ 48.90/95

c) If the Company borrows in pounds and covers the exchange rate risk through forward market.

d) keeps the position open and the spot rate after 3 months turns out to be Rs/GBP 74.75/80.

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Dharmesh (Student CA Final ) (43 Points)
Replied 26 March 2014

This is the solution I came up with. for part a

US Borrowing

Let the amount to be borrowed be x

48.50x = Rs 50 mn

x= $1.03 mn

Outflow after 3 months = $1.03 + ($1.03 x 4% x 3/12) = $1.0403mn

If forward cover is taken then; $ 1.03 x 49.05 = Rs 50.52 mn

Annualised Cost of borrowing = (50.52 -50)/50 x 100 x 12/3 = 4.16% p.a

f no cover is taken then $1.03 x Rs 48.95 =Rs 50.4185 mn

Annualised cost of borrowing = 50.4185 - 50/50 x 100 x 12/3 = 3.348% pa

Is this correct? or would I need to take $1.0403 instead of the highlighted figures and calculate the annualised cost based on this figure? Plz help. I am really confused.