Regarding solution of a foreign exchange sum

Final 5818 views 11 replies

Suzaan

Student

43 Points Joined February 2010

Below is the solution of a question of foreign exchange which came in the term Nov, 2005. Can someone elaborate the treatments and make me understand the whole solution? I didn't undersand the solution.

Thank you in advance.

Question:

You as a dealer in foreign exchange have the following position in Swiss Francs on 31st October, 2004:

	Swiss Francs
Balance in the Nostro A/c Credit	1,00,000
Opening Position Overbought	50,000
Purchased a bill on Zurich	80,000
Sold forward TT	60,000
Forward purchase contract cancelled	30,000
Remitted by TT	75,000
Draft on Zurich cancelled	30,000

What steps would you take, if you are required to maintain a credit Balance of Swiss Francs 30,000 in the Nostro A/c and keep as overbought position on Swiss Francs 10,000?

(7 Marks) (November, 2005)

Answer

Exchange Position/Currency Position:

Particulars	Purchase Sw. Fcs.	Sale Sw. Fcs.
Opening Balance Overbought	50,000
Bill on Zurich	80,000
Forward Sales – TT		60,000
Cancellation of Forward Contract		30,000
TT Sales		75,000
Draft on Zurich cancelled	30,000	________
	1,60,000	1,65,000
Closing Balance Oversold	5,000	_______
	1,65,000	1,65,000
Cash Position (Nostro A/c)
	Credit	Debit
Opening balance credit	1,00,000
TT sales	________	75,000
	1,00,000	75,000
Closing balance (credit)	_______	25,000
	1,00,000	1,00,000

The Bank has to buy spot TT Sw. Fcs. 5,000 to increase the balance in Nostro account to Sw. Fcs. 30,000.

This would bring down the oversold position on Sw. Fcs. As Nil.

Since the bank requires an overbought position of Sw. Fcs. 10,000, it has to buy forward Sw. Fcs. 10,000.

Replies (11)

pankaj

50 Points Joined January 2009

This question have got two aspects:

1. Exchange position (Position as in books)

2. Cash position (cash which you actually have with you in your Nostro A/c)

1st we talk of Exchange position:

We initially had overbought SF50000. (That means in our books, we have purchased SF50000)

Then we further purchased a bill of SF80000 which will increase our balance in books.(Had we received SF actually, it would have affected our cash position and not our exchange position)

Then we sold FORWARD SF60000 which will reduce balance in our books. (It wouldnt affect cash position as we didnt pay it actually, it is a forward contract only)

Then we cancelled a purchase contract, meaning purchase shall be reduced by SF30000. (Again there is nothing to do with cash)

Then we remitted SF75000 but it shall have no impact on our books (because in our books we must have recorded this transaction at the time of forward sale) and hence it will affect only our cash position.

Lastly, draft (sale) cancelled hence to be added in purchases SF 30000.

Talking about Cash position

We actually owned SF100000 in our Nostro A/c at the beginning.

Then we remitted SF75000 which will affect our cash position as we actually paid SF (not just entered into a contract.)

So the closing balance of SF which we have in our A/c is SF25000.

pankaj

50 Points Joined January 2009

Arghh, I am so poor at expIaining.

I hope I have made myself clear, any doubts still remaining, you may reply or PM me.

Suzaan

Student

43 Points Joined February 2010

@ Pankaj: Thank u so much for ur reply . Your explanation was very good and made me understood the solution. Still I have two confusions:

1) Draft on zurich cancelled worth SF 30000 .... How did u understand that it's related to sales? It may be related to purchase.

2) Remittance by TT worth SF 75000 ..... As per ur explanation, it should not affect the book. But in the solution it appeared both in books and cash position in Nostro A/c.

Thank u once again for your time and explanation.

pankaj

50 Points Joined January 2009

Thanks!

Regarding your First point, I want to ask you a general question. Had it been written Draft (Bill of exchange) on Zurich, what you would have considered it??

Regarding the second point, it was a mistake on my part. It should affect both positions. Because we have actually paid SF and simultaneously, our exchange position will also get affected because we have paid it TODAY. So I apologize for this..:-)