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CA Final · Advanced Financial Management · Foreign Exchange Exposure and Risk Management

Quotes: USD/INR 83.00 in Mumbai; GBP/USD 1.2500 in London; GBP/INR 104.50 in Mumbai. An arbitrageur starts with Rs 83,00,000 and ignores costs. Which sequence gives a risk-free gain and how much?

This item was malformed.

  1. AINR to USD to GBP to INR, gain Rs 1,00,000
  2. BINR to GBP to USD to INR, gain Rs 40,000
  3. CINR to USD to GBP to INR, gain Rs 40,000Correct
  4. DNo gain, as rates are consistent

Explanation

Cross rate GBP/INR = 1.25 x 83 = 103.75, below Mumbai's 104.50, so GBP is dear in Mumbai: acquire GBP via USD. Rs 83,00,000 = USD 1,00,000 = GBP 80,000 (at 1.25). Sell at 104.50 = Rs 83,60,000, gain Rs 60,000. Recheck: 80,000 x 104.50 = 83,60,000. Gain is Rs 60,000, which is not listed; option 3 gives the correct route but the amount shown is wrong.

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