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Solution
a) Amount = 5000 x 20 = $100,000
Repayment in 3 months time = 100000(1 + 0.07/4) = $101750
3-month outright forward rate = 49.00/49.15
Repayment obligation in rupees = $101750 x 49.15 = Rs. 5,001,012.50
b) Rupee overdraft = 100000 x 48.80 = Rs. 4,880,000
Interest on overdraft = 4880000 x (1 + 0.10/4) = Rs. 5,002,000.00
The first option is better.
6. Calculate the 30-day, 90-day, and 180-day forward discounts for the British pound.
Here are the relevant rates for the pound:
Spot:
1 = $1.8220
30-day forward:
1 = $1.8180
90-day forward:
1 = $1.8086
180-day forward: 1 = $1.7949
ANSWER.
The 30-day forward discount is: [($1.8180 - $1.8220)/$1.8220] x 12 x 100 = -2.63%
The 90-day forward discount is: [($1.8086 - $1.8220)/$1.8220] x 4 x 100 = -2.94%
The 180-day forward discount is: [($1.7949- $1.8220)/$1.8220] x 2 x 100 = -2.97%
In this case, the forward discounts at these maturities are not very small, indicating that
British and U.S. interest rates are quite distinct from each other.