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NMIMS
Master of
Business Administration - MBA Semester 4
International Banking
Q1. Mumbai Ltd. is an Indian company, they are
in process of raising a US dollar loan and are negotiating rates with City
Bank. The Company has been offered a fixed rate of 7% p.a with a proviso that
should they opt for a floating rate, the interest rate is likely to be linked
to the bench mark rate of 60 basis points over the 10 year US T Bill Rate, with
interest refixation on a three monthly basis. The expectations of Mumbai Ltd.
are that the dollar interest rates will fall, and are inclined to have a flexible
mechanisms built into their interest rates. On enquiry they find that they
could go for swap arrangement with Chennai India Ltd. who have been offered a
floating rate of 120 basis points over 10 year US T Bill Rate, as against a
fixed rate of 8.20%. Describe the swap on the assumption that the swap
differential is shared between Mumbai Ltd. and Chennai India Ltd. in the
proportion of 2: 1.
Answer. Mumbai Ltd. expects that interest rate will
fall so they should opt for floating interest. Swap arrangement can be as
under:
The rates are
identified:-
Q2. XYZ Ltd. Is planning to import a
multi-purpose machine from Japan at a cost of 3400 lakhs yen. The company can
avail loan at 18% interest per annum compounded quarterly with which it can
import the machine. However, there is an offer from Tokyo branch of an India
based bank extending credit of 180 days at 2% per annum against opening of an
irrevocable letter of credit. Other information: -
Present exchange rate Rs. 100 = 340 yen
180 days forward rate Rs. 100 = 345 yen
Commission charges for letter of credit at 2%
per 12 months.
Advise whether the offer from the foreign
branch should be accepted?
Answer. Option I (To finance the purchase by availing
loan at 18% per annum):
Cost of
machine Rs. in lakhs
3,400 lakh yen as
Rs.100 = 340 yen = 1,000.00
Add: Interest at
4.5% I Quarter = 45.00
Add: Interest at
4.5
Q3. Nitrogen Ltd, a UK company is in the
process of negotiating an order amounting to €4 million with a large German
retailer on 6 months credit. If successful, this will be the first time that
Nitrogen Ltd has exported goods into the highly competitive German market. The
following three alternatives are being considered for managing the transaction
risk before the order is finalized.
i. Invoice the German firm in Sterling using
the current exchange rate to calculate the invoice amount.
ii. Alternative of invoicing the German firm
in € and using a forward foreign exchange contract to hedge the transaction
risk.
iii. Invoice the German first in € and use
sufficient 6 months sterling future contracts (to the nearly whole number) to
hedge the transaction risk.
Following data is available:
Spot Rate € 1.1750 - €1.1770/£
6 months forward premium 0.55-0.60 Euro Cents
6 months future contract is currently trading
at €1.1760/£
6 months future contract size is £62500
Spot rate and 6 months future rate €1.1785/£
Required:
a. Calculate to the nearest £ the receipt for Nitrogen
Ltd, under each of the three proposals.
b. In your opinion, which alternative would
you consider to be the most appropriate and the reason thereof.
Answer. Assuming that 6 month forward premium is
considered as discount, because generally premium is mentioned in ascending
order and discount is mentioned in descending order.
i) Receipt under
three proposals
a) Invoicing in
pound sterling: € 40,00,000/1.1770= £ 33,98,471
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