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Exchange Rate Numerical Problems – Spot & Forward

Calculations are the easiest way to score full marks in International Finance.

Problem 1: Calculating Annualized Premium

Question:

  • Spot Rate ($/₹): 80.00
  • 3-Month Forward Rate: 82.00
  • Calculate the Annualized Forward Premium.

Solution:

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Problem 2: Cross Rate Calculation

Question:

  • Quote A: 1 USD = ₹ 83.00
  • Quote B: 1 GBP = $ 1.25
  • Find: The GBP/INR Rate (Price of 1 Pound in Rupees).

Solution:

  • We need GBP -> INR.
  • Path: GBP -> USD -> INR.
  • Formula: GBP/INR = (GBP/USD) * (USD/INR).

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Problem 3: Bid-Ask Decision

Question:

  • Bank Quote: USD/INR = 82.10 / 82.50.
  • Case A: Exporter wants to sell $1,000. How much Rupees will he get?
  • Case B: Importer wants to buy $1,000. How much Rupees will he pay?

Solution:

  1. Rule: Bank Buy Low (Bid), Sell High (Ask).
  2. Case A (Exporter Selling): Bank Buys at Bid.
    • 1000 * 82.10 = ₹ 82,100.
  3. Case B (Importer Buying): Bank Sells at Ask.
    • 1000 * 82.50 = ₹ 82,500.
  4. Spread Cost: Rs 400.

Exam Notes: Tips

  1. Annualization: Always check if the question asks for "Premium" (absolute) or "Annualized Premium %". If "p.a." is written, multiply by 12/n.
  2. Cross Rates: Write the units to cancel them out. (GBP/USD) * (USD/INR). USD cancels out, leaving GBP/INR.

Quiz Time! 🎯

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