3. An Indian exporter has an ongoing order from USA for 2000 pieces per month at a price of $ 100. To execute the order, the exporter has to import Yen 6000 worth of material per piece. Labour costs are Rs. 350 per piece while other variable overheads add up to Rs. 700 per piece. The exchange rate is currently Rs. 35/$ and Yen 120/$. Assuming that the order will be executed after 3 months and payment is obtained immediately on shipment of goods, calculate the loss/gain due to transaction exposure if the exchange rates change to Rs. 36/$ and Yen 110/$.
4. In the above problem, if the contract export price is Rs. 3500, calculate losses/gains due to transaction exposure and economic exposure. Assume that the elasticity of demand for the product is -2 in USA.
5. An Indian exporter has obtained an order for supplying automotive breaks at the rate of $ 100 per piece. The exporter will have to imports part worth $ 50 per piece. In addition, variable cost of Rs. 200 will be incurred per piece. Explain the impact of the following if the exchange rate which is currently Rs. 36/$ moves to Rs. 40/$.
7. Economic exposure if invoicing is done in Rupees, price elasticity of demand is -1.5 and the current order quantity is 1000 units.
8. A corporate treasurer is trying to hedge the foreign currency risk associated with a loan of face value C$ 1,000,000. Interest is payable semi-annually on the loan at the rate of 8% p.a. The principal will be repaid after 2 years. Since forward contracts are available for a maximum period of 6 months, the treasure has decided to use a roll over forward cover. If the loan is availed of on 1/1/03 and interest payments begin from 1/7/03, work out the effective cost of the loan. Assume that the exchange rates on the dates of roll over of the forward contract are as follows:
![INTERNATIONAL FINANCE<br />,[object Object],The following are the spot rates (Rs / Canadian dollar) and six month forward rates (Rs/C$) prevailing at the end of each roll over period. Determine the cash flows and compare the result with a situation when the corporate leaves the exposure uncovered. You may assume that the cost of capital for the company is 20%.<br />DateSpot rate (Rs/C$)Six-month forward rate1/1/0235.0035.201/7/0235.1535.301/1/0335.2535.351/7/0335.3535.501/1/0435.4535.60<br />,[object Object]](https://image.slidesharecdn.com/if1-12726114311225-phpapp02/85/If-1-1-320.jpg)
