Section-A

problem1) Describe components of balance of payment (BOP) account.  What is the managerial implication of the deficit or surplus of BOP?

problem2) How has exchange rate evolved over the year? What kind of exchange rate regime does India follows?

problem3)a) What is foreign exchange market? What are the features of foreign exchange market? Who are the main participants of forex market?

b) What is exchange rate?  What are the types of quotation available? If the spot rate of Rs / GBP is: 81.55 – 84.75  and Rs / Euro is:  59.35 – 62.60  then  find  the spot rate of USD / GBP.

problem4) Describe the factors which affect foreign exchange rates. What are the parity conditions?

Section-B

Case Study

Following information about exchange rate and interest rate are available:
Spot rate                              : Rs 56.88 / US$
3 month forward rate            : Rs. 61.75 /US$
3 month interest rate in US    : 4% pa
3 month interest rate in India : 7% pa

Case problems:

Does arbitrage gain exist, how? Assuming no transaction cost or taxes exist, what operation will be carried out to take the possible arbitrage gain, if any? Suppose Rs. 10 million or US$ 10 million borrowings (as the case may be) to describe your answer.