Module: | MODULE A: INTERNATIONAL BANKING
Q15: A manufacturing firm in Chennai, India, has an upcoming import bill of 20,00,000 US Dollars due in exactly three months. To protect against the potential depreciation of the Indian Rupee, the firm approaches its Authorized Dealer to book a forward contract. The ongoing interbank spot selling rate, or Ask rate, for the US Dollar is 83.20 Indian Rupees. The interbank three month forward premium is currently quoted at 0.30 Indian Rupees. The bank internal policy dictates charging a merchant exchange margin of 0.05 Indian Rupees per US Dollar on the final forward rate to the customer. Calculate the exact total final outflow in Indian Rupees for this manufacturing firm on the settlement date.
✅ Correct Answer: C
🎯 Quick Answer:
The firm total outflow will be exactly 16,71,00,000 Indian Rupees.The forward rate is derived by adjusting the spot rate with the forward premium and the bank profit margin.
Structural Breakdown: 1. Identify the transaction flow.
The Indian firm needs to send US Dollars abroad.
Therefore, the firm must buy US Dollars from the bank.
The bank is selling US Dollars to the customer.
2. Determine the Base Rate.
The bank will use its Spot Selling Rate, which is the Ask rate of 83.20 Indian Rupees.
3. Factor in the Time Value, or Premium.
The US Dollar is at a premium, meaning it is more expensive in the future.
The premium of 0.30 must be added to the spot rate.
Base Forward Rate equals 83.20 plus 0.30 equals 83.50 Indian Rupees.
4. Apply the Exchange Margin.
Since the bank is selling, it wants to maximize its final rate.
The rule is to add the profit margin to the selling rate.
Final Merchant Rate equals 83.50 plus 0.05 equals 83.55 Indian Rupees per US Dollar.
5. Final Calculation is 20,00,000 US Dollars multiplied by the locked in rate of 83.55 equals 16,71,00,000 Indian Rupees.
This is read as Sixteen Crores, Seventy-One Lakhs Rupees.