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CS Professional · Strategic Management and Corporate Finance · Foreign Funding - Institutions

Bharat Auto Ltd raised a foreign currency ECB of USD 2 million when the exchange rate was Rs 80 per USD, and holds a rupee loan equivalent of nothing else. The all-in-cost is a fixed 6% per annum on the USD outstanding. At the end of the year the rate is Rs 84 per USD and the company repays interest only (no principal). What is the rupee cost of interest paid at the year-end rate, and what is the unhedged rupee value of the principal liability at year-end?

Interest is 6% of USD 2 million, which is USD 120,000, or Rs 1.008 crore at Rs 84. The unhedged principal liability is USD 2 million times 84, which equals Rs 16.8 crore. Using the old rate of Rs 80 would wrongly understate both amounts.

  1. AInterest Rs 99.6 lakh; principal Rs 16.8 crore
  2. BInterest Rs 1.008 crore; principal Rs 16.0 crore
  3. CInterest Rs 1.008 crore; principal Rs 16.8 croreCorrect
  4. DInterest Rs 96 lakh; principal Rs 16.8 crore

Explanation

Interest = 6% x USD 2,000,000 = USD 120,000; at Rs 84 this is Rs 1,00,80,000 = Rs 1.008 crore. Principal at year-end = 2,000,000 x 84 = Rs 16.8 crore. Using the original Rs 80 rate gives Rs 96 lakh interest and Rs 16 crore principal, which ignores the rupee depreciation.

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