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:

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).

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! 🎯