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CA Final · Advanced Financial Management · Derivatives Analysis and Valuation

Kaveri Auto Ltd, an Indian company, has a 3-year currency swap on USD 5 million against rupees, with the initial exchange at ₹80/USD (₹40 crore). Kaveri receives USD interest at 5% p.a. on the dollar principal and pays rupee interest at 9% p.a. on the rupee principal. At the first annual settlement the spot rate is ₹82/USD. Interest is exchanged gross, and Kaveri converts the USD interest received at spot. What is Kaveri's net rupee outflow on this interest exchange?

The net rupee outflow is ₹1.55 crore. Rupee interest paid is 9% of ₹40 crore, or ₹3.60 crore. USD interest received is USD 250,000, worth ₹2.05 crore at ₹82. The difference between the two is ₹1.55 crore.

  1. A₹1.60 crore
  2. B₹5.65 crore
  3. C₹1.55 croreCorrect
  4. D₹2.05 crore

Explanation

Rupee interest paid = 9% × ₹40 crore = ₹3.60 crore. USD interest received = 5% × USD 5 million = USD 250,000, which at ₹82 is ₹2.05 crore. Net outflow = 3.60 − 2.05 = ₹1.55 crore. Converting at ₹80 instead would give ₹1.60 crore, which is the mistake of using the initial rate.

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