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CMA Final · Strategic Financial Management · Swaps

An Indian firm enters a one-year currency swap. At inception it receives $1,000,000 and pays ₹8 crore, at a spot rate of ₹80/$. At the end of year 1 it pays 8% interest on ₹8 crore and receives 5% interest on $1,000,000. The spot rate then is ₹82/$, and the interest settles at that spot rate with no netting of principal. What is the net rupee interest cash flow for the firm at the end of year 1?

The firm has a net outflow of ₹23 lakh. It pays ₹64 lakh as rupee interest and receives $50,000, which converts to ₹41 lakh at the ₹82 spot rate. The settlement must use the year-end rate, not the inception rate.

  1. ANet inflow of ₹23 lakh
  2. BNet outflow of ₹24 lakh
  3. CNet outflow of ₹23 lakhCorrect
  4. DNet outflow of ₹64 lakh

Explanation

The rupee interest paid is 8% × ₹8 crore = ₹64 lakh. The dollar interest received is 5% × $1,000,000 = $50,000. At ₹82 this is ₹41 lakh. The net is 41 − 64 = ₹23 lakh outflow. Using the inception rate of ₹80 gives ₹40 lakh received and an outflow of ₹24 lakh, which is the wrong rate. Ignoring the dollar receipt gives ₹64 lakh.

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