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CA Final · Advanced Financial Management · Derivatives Analysis and Valuation

Kaveri Industries, an Indian firm, enters a 3-year currency swap at a spot rate of ₹80/USD. It exchanges ₹80 crore for USD 1 crore at inception. It pays INR interest at 8% p.a. on ₹80 crore and receives USD interest at 5% p.a. on USD 1 crore, annually. At the end of year 1 the spot rate is ₹82/USD. What is Kaveri's net INR outflow on the first interest settlement, with the USD receipt converted at the spot rate?

The net INR outflow is ₹2.30 crore. Kaveri pays 8% on ₹80 crore, which is ₹6.4 crore. It receives 5% on USD 1 crore, which is USD 0.05 crore, worth ₹4.1 crore at ₹82. The difference is ₹2.3 crore.

  1. A₹2.30 croreCorrect
  2. B₹2.40 crore
  3. C₹2.46 crore
  4. D₹10.50 crore

Explanation

INR interest paid = 8% × 80 crore = ₹6.4 crore. USD interest received = 5% × USD 1 crore = USD 0.05 crore, which at ₹82 is ₹4.1 crore. Net outflow = 6.4 − 4.1 = ₹2.3 crore. Converting the receipt at ₹80 gives ₹2.4 crore, which is wrong because the settlement is at the year-end spot.

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