Page 141 - DMGT549_INTERNATIONAL_FINANCIAL_MANAGEMENT

International Financial Management

Notes (b) Dollar cash flow is as follows:
(i) SR: ¥ 140/$
Dollar cash flow = (1976597 × 140 – 4901961) – 250000000
= 21821619¥ = $155869
(ii) SR: ¥115/$

Dollar cash flow = (1976597 × 115 – 4901961) – 250000000
= – 27593305 ¥ = $239942

Task Assume that a speculator purchased a call option on Swiss francs for $0.1 per unit.
The strike price was $.45 and the spot rate at the time the franc was exercised was $.46.
Assume there are 62,000 units in a Swiss franc option. What was the net profit on this
option to the speculator?

Case Study HDFC in the First Rupee Currency Swap Deal

he first five-year dated rupee currency swaps were booked in India with HDFC
Bank booking two 5-year dollar/rupee currency swaps of Reliance Industries Ltd
T(RIL) and IPCL for $ 17 million (` 60 crore). This was the first such deal after Reserve
Bank of India (RBI) permitted banks to run a swap book and corporates to swap a rupee
liability into a foreign currency liability.
In April 1997, the RBI allowed banks to deal in swaps, without its permission for tenors
over six months. The RBI also in the same credit policy, initiated steps to develop a deeper,
liquid rupee term market. In the past corporates and banks needed prior regulatory approval
to book dollar/rupee currency swaps.
The recent liberalization steps of the RBI now allow corporate and banks to deal in these
derivative transactions relatively freely to manage their assets and liabilities in a more
efficient manner. By doing these swaps RIL and IPCL were able to hedge the risk arising
from a change in the value of rupee and to swap rupee borrowings into a foreign currency
denominated liability. HDFC Bank structured the transactions so that the bank was
counterpart to both the clients.
The bank assumed the counter party credit risk besides arranging and structuring the
transaction.
Question
Comment on the above deal.
Source: International Financial Management, Madhu Vij, Excel Books.

8.7 Summary

A futures contract represents a contractual agreement to purchase or sell a specified asset
in future for a specified price that is determined today. The specified price is the future
price. The basic reason why a currency future market arose was because private individuals
were unable to avail themselves of the forward market.

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