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CMA Final · Strategic Financial Management · Foreign Exchange Market

A dealer observes: spot USD/INR 83.00; one-year forward 84.50; one-year interest rates 7% in India and 3% in the USA. Ignoring transaction costs, the dealer borrows USD 100,000 at 3%, converts to INR, invests at 7%, and covers forward. What is the covered arbitrage profit in INR at year end?

The profit works out to Rs 1,77,500, which is not among the options.

  1. ARs 12,450 approxCorrect
  2. BRs 21,500 approx
  3. CRs 3,400 approx
  4. DRs 8,300 approx

Explanation

INR obtained = 83,00,000; at 7% grows to 88,81,000. USD owed = 103,000; buying at forward 84.50 costs 87,03,500. Profit = 88,81,000 - 87,03,500 = 1,77,500. None of the options matches this, so the item is flawed.

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