- XYZ exchange center sold Bahamian Dollar (BSD) 32,000 value spot to customer at INR Rs. 74.55 per BSD and covered itself in UK stock exchange on the same day, when the exchange rates were
GBP1 =BSD 1.38478 SELLING BSD 1.38498 BUYING
Local inter bank market rates for GBP were
Spot GBP 1 = INR Rs. 103.087 SELLING INR Rs. 103.289 BUYING
Calculate cover rate and ascertain the profit and loss in the transaction. Ignore Brokerage.
Solution:
Cross Over Rates
| Indian Rupee-GBP Selling Rate | INR Rs. 103.289 |
| Bahamian Dollar – GBP Selling Rate | BSD 1.38478 |
| Indian Rupees- Bahamian Dollar | INR Rs. 103.289/1.38478 |
| INR Rs. 74.58 |
Profit or Loss to the Bank
| Amount received from customer ( 32,000*74.55) | Rs. 2,385,600 |
| Amount paid on cover deal (32,000*74.58 | Rs. 2,386,560 |
| Loss in the deal | Rs. 960 |
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2. ABC Limited is a listed real estate development company in Nepal, with a significant operation in Kathmandu Metropolitan Region. The company bas a export exposure of HKD 5,00,000 payable August 31, 2020. Hong Kong Dollar (HKD) is not directly quoted in Nepalese Rupees. The current spot rates are:
| NPR/GBP | Rs. 164.72 |
| HKD/GBP | HKD 10.72 |
It is estimated that Hong Kong Dollar will depreciated to 12.54 level and Nepalese Rupees to depreciate against GBP to Rs. 166.68. Forward rates for August 2020 are
| NPR/GBP | Rs.167.30 |
| HKD/GBP | HKD 11.77 |
Calculate:
a) Calculate the expected profit/loss, if the hedging is not done. How the position will change, if the firm takes forward cover?
b) If the spot rates on August 31 2020, 2014 are:
NPR/GBP= Rs. 165
HKD/GBP= HKD 11 Is the decision to take forward cover justified?
Solution:
We first calculate the cross exchange rate between Nepalese Rupees and Hong Kong Dollar as follows:
NPR/GBP*GBP/HKD = 164.72/10.72 = Rs 15.365
Spot rate on date of export 1HKD = Rs 15.365
Expected Rate of HKD for August 2020 = 166.68/12.54 = Rs.13.29
Forward Rate of HKD for August 2020 = 167.30/11.77 = Rs. 14.21
a) Calculation of expected profit/loss (without Hedging)
| Value of export at the time of export (Rs.15.365*5,00,000) | Rs.76,82,500 |
| Estimated payment to be received on August 2020 (Rs. 13.29*500,000) | Rs.66,45,000 |
| Loss | Rs. 10,37,500 |
Hedging of loss under Forward cover
| Value of export at the time of export (Rs.15.365*5,00,000) | Rs.76,82,500 |
| Payment conditions under forward cover (Rs. 14.21*500,000) | Rs. 71,05,000 |
| Loss | Rs. 5,77,500 |
By considering Forward cover, the company can actually reduce its loss in the process by Rs. 460,000.
b) Actual rate of HKD on August 2020 = Rs. (165/11) = Rs. 15
| Value of export at the time of export (Rs. 15.365*500,000) | Rs. 76,82,500 |
| Estimated payment to be received on August 2020 (Rs.15*500,000) | Rs. 75,00,000 |
| Loss | Rs.1,82,500 |
By considering Forward cover with given condition, the company incurred the loss by Rs. 1,82,500. Hence, the decision of forward cover is justifies
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