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CMA Final · Strategic Financial Management · Swaps

Under a currency swap between an Indian firm and a US firm, the Indian firm receives USD 2 million at the start against paying Rs 16.4 crore at Rs 82/USD. At maturity, the principal is re-exchanged at the original rate. Spot at maturity is Rs 86/USD. What is the Indian firm's rupee cost of returning the USD principal under the swap compared with buying USD in the market?

The Indian firm pays Rs 16.4 crore under the swap against Rs 17.2 crore in the market, saving Rs 0.8 crore. The principal is re-exchanged at the original Rs 82 per USD, so the rupee depreciation to Rs 86 does not hurt it.

  1. ARs 16.4 crore under the swap; Rs 17.2 crore in the market, saving Rs 0.8 croreCorrect
  2. BRs 17.2 crore under the swap; Rs 16.4 crore in the market, loss Rs 0.8 crore
  3. CRs 16.4 crore under both
  4. DRs 0.8 crore under the swap; Rs 17.2 crore in the market

Explanation

Swap re-exchange at the original Rs 82: 2 million x 82 = Rs 16.4 crore. Market purchase at Rs 86: 2 million x 86 = Rs 17.2 crore. Saving = Rs 0.8 crore. Option 2 reverses the legs.

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