You, a foreign exchange dealer of your bank, are informed that your bank has sold a T.T. on Copenhagen for Danish Kroner 10,00,000 at the rate of Danish Kroner 1 = Rs. 6.5150.
You are required to cover the transaction either in London or New York market. The rates on that date are as under:
In which market will you cover the transaction, London or New York, and what will be the exchange profit or loss on the transaction? Ignore brokerages.
Solution
Amount realized on selling Danish Kroner 10,00,000 at Rs. 6.5150 per Kroner = Rs. 65,15,000.
Cover at London:
Bank buys Danish Kroner at London at the market selling rate.
Pound sterling required for the purchase (DKK 10,00,000 ÷ DKK 11.4200) = GBP 87,565.67
Bank buys locally GBP 87,565.67 for the above purchase at the market selling rate of Rs. 74.3200.
The rupee cost will be = Rs. 65,07,88
Profit (Rs. 65,15,000 – Rs. 65,07,881) = Rs. 7,119
Cover at New York:
Bank buys Kroners at New York at the market selling rate.
Dollars required for the purchase of Danish Kroner (DKK10,00,000 ÷ 7.5670) = USD 1,32,152.77
Bank buys locally USD 1,32,152.77 for the above purchase at the market selling rate of Rs. 49.2625.
The rupee cost will be = Rs. 65,10,176.
Profit (Rs. 65,15,000 – Rs. 65,10,176) = Rs. 4,824
The transaction would be covered through London which gets the maximum profit of Rs. 7,119 or lower cover cost at London Market by (Rs. 65,10,176 – Rs. 65,07,881) = Rs. 2,295
