Q50086 An Indian Company obtains the following quotes (Rs/$)

An Indian Company obtains the following quotes (Rs/$)

Spot                                                     35.90/36.10

3 month forward rate                        36.00/36.25

6 month forward rate                        36.10/36.40

The company needs dollar funds for 6 months. Determine wheather the company should borrow in $ or Rs. Interest rates are

3 month interest rate                        Rs 12%, $ 6%

6 month interest rate                        Rs 11.5%, $ 5.5%

Also determine what should be the rate of interest after 3 months to make the company indifferent between 3 months borrowing and 6 month borrowing in the case of

1. Rupee borrowing
2. Dollar borrowing

Note : For the purpose of calculation you can take the units of $ and Rs. as 100 each.

Solution

1.

• Indian Co.
• Needs $ funds for 6 Months

Alternative 1 = $ Borrow

$ 10000 @ 5.5% for 6 months

Amount Payable = 10000 x 1.0275 = $ 10275 Forward cover i.e by $10275

6mf forward @ 36.40

Amount Payable = 10275 x 36.75 = ₹ 374010

Alternative 2 = $ Borrow

Amount needed                                    $ 10000

Spot ₹/$                                                        36.10

i.e. ₹ 10000 x 36.10                               = ₹ 361000

Borrow ₹ 361000 @ 11.5%

Amount payable = 361000 x 1.0575 = ₹ 381757.5 Decision = Borrow $

2. Rate of interest after 3 months to make the company indifferent between 3 months borrowing and 6 month borrowing

F36 = ( 1.0575/1.03 ) – 1 = = 2.6699 % i.e 10.6796%

F36 = ( 1.0275/1.015) – 1 = 1.23% i.e 4.926%