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True view Ltd. a group of companies controlled from the United Kingdom includes subsidiaries in India, Malaysia and the United States. As per the CFO's forecast that , at the end of the June 2010 the position of inter-company is as follows: i. The Indian subsidiary will be owned or will receive `1,44,38,100 by the Malaysian subsidiary and will to owe or will pay the US subsidiary US$ 1,06,007. ii. The Malaysian subsidiary will be owed or will receive MYR 14,43,800 by the US subsidiary and will owe it or will pay US$ 80,000 Suppose you are head of central department of the group and you are required to net off inter-company balances as far as possible and to issue instructions for settlement of the net balance. For this purpose, the relevant exchange rates may be assumed in term of 1 are US$ 1.415; MYR 10.215; `68.10. What are the net payments to be made in respect of the above balances? Solution : India Malaysia US India Malaysia (US$ 80,000) US US$ 80,000 - (`1,44,38,100) US$ 1,06,007 `1,44,38,100 - MYR 14,43,800 (US$ 1,06,007) MYR 14,43,800 - Table showing conversion of above position into pound sterling India Malaysia US Total India Malaysia (56,537) US 56,537 - (2,12,013) (1,27,209) 74,917 - 2,12,013 - (1,41,341) (9,887) (74,917) 1,41,341 1,37,096 NIL Decision : Central treasury department will instruct the Malaysia subsidiary to pay the Indian subsidiary. 1,27,209 and the US subsidiary to pay the Indian subsidiary 9,887. Forex-Practice Problems 26 SANJAY SARAF SIR INTERNATIONAL WORKING CAPITAL MANAGEMENT PROBLEM - 18 True view Ltd. a group of companies controlled from the United Kingdom includes subsidiaries in India, Malaysia and the United States. As per the CFO's forecast that , at the end of the June 2010 the position of inter-company is as follows: i. The Indian subsidiary will be owned or will receive `1,44,38,100 by the Malaysian subsidiary and will to owe or will pay the US subsidiary US$ 1,06,007. ii. The Malaysian subsidiary will be owed or will receive MYR 14,43,800 by the US subsidiary and will owe it or will pay US$ 80,000 Suppose you are head of central department of the group and you are required to net off inter-company balances as far as possible and to issue instructions for settlement of the net balance. For this purpose, the relevant exchange rates may be assumed in term of 1 are US$ 1.415; MYR 10.215; `68.10. What are the net payments to be made in respect of the above balances?

OJ Ltd. Of UK is supplier of leather goods to retails in the UK and other Western European countries. The company is considering entering into a joint venture with a manufacturer in South America. The two companies will each own 50% of the limited liability company JV(SA) & will share profits equally. 450,000 of the initial capital is being provided by OJ Ltd. and the equivalent in South American collars (SA$) is being provided by the foreign partner. The managers of the joint venture expect following cash flows : SA$ 000 Forward rates of exchange to the Sterling [SA$/] Year 1 4,250 10 Year 2 6,500 15 Year 3 8,350 21 For tax reasons JV(SA) the company to be formed for the joint venture, will be registered in South America. Ignore taxation in your calculations Requirements : Assume you are financial adviser retained by OJ Limited to advise on the proposed joint venture. i. Calculate NPV of the project under the two assumptions explained below. Use a discount rate of 16% for both assumptions. Assumption 1 : The South American country has exchange controls which prohibit the payment of cash flows above 50% of the annual cash flows for the first three years of the project. The accumulated balance can be repatriated at the end of the third year. Assumption 2 : The government of the South American country is considering removing exchange controls and restriction on repatriation of profits. If this happens all cash flows will be distributed to the partner companies at the end of each year. ii. Comment briefly on whether or not the joint venture should proceed based on these calculations. Forex-Practice Problems 32 SANJAY SARAF SIR INTERNATIONAL PROJECT APPRAISAL PROBLEM - 23 OJ Ltd. Of UK is supplier of leather goods to retails in the UK and other Western European countries. The company is considering entering into a joint venture with a manufacturer in South America. The two companies will each own 50% of the limited liability company JV(SA) & will share profits equally. 450,000 of the initial capital is being provided by OJ Ltd. and the equivalent in South American collars (SA$) is being provided by the foreign partner. The managers of the joint venture expect following cash flows : SA$ 000 Forward rates of exchange to the Sterling [SA$/] Year 1 4,250 10 Year 2 6,500 15 Year 3 8,350 21 For tax reasons JV(SA) the company to be formed for the joint venture, will be registered in South America. Ignore taxation in your calculations Requirements : Assume you are financial adviser retained by OJ Limited to advise on the proposed joint venture. i. Calculate NPV of the project under the two assumptions explained below. Use a discount rate of 16% for both assumptions. Assumption 1 : The South American country has exchange controls which prohibit the payment of cash flows above 50% of the annual cash flows for the first three years of the project. The accumulated balance can be repatriated at the end of the third year. Assumption 2 : The government of the South American country is considering removing exchange controls and restriction on repatriation of profits. If this happens all cash flows will be distributed to the partner companies at the end of each year. ii. Comment briefly on whether or not the joint venture should proceed based on these calculations.

Pacific Leather Goods Ltd. an Indian manufacturer exports leather goods to USA. The company is exporting 5000 units at a price of $60. The company has imported some specialty chemicals from Europe to produce the export items. The cost of chemicals per unit of leather good stands at Euro 10. The fixed overhead costs per unit comes at Rs.250 and other variable overheads, including the freight cost, add upto Rs.1250 per unit. The payments for both exports and imports are due in six months. The current exchange rate are as follows: Rs./$ 46.90 Rs./Euro 40.40 After six months (at the time of settlement of payments) the exchange rate turns out as follows: Rs./$ 47.90 Rs./Euro 41.25 You are required to: i. Calculate the loss/gain due to transaction exposure. ii. Based on the following additional information calculate the losses/gains due to transaction and operating exposure if the contracted export price per unit is Rs.2700: The current exchange rate changes to Rs./$ : 47.50 Rs./Euro : 40.80 Price elasticity of demand for the company's product in the USA is estimated to be 1.60. The payments are to be settled at the end of sixth month. Strategic Financial Management 23 SANJAY SARAF SIR PROBLEM - 16 Pacific Leather Goods Ltd. an Indian manufacturer exports leather goods to USA. The company is exporting 5000 units at a price of $60. The company has imported some specialty chemicals from Europe to produce the export items. The cost of chemicals per unit of leather good stands at Euro 10. The fixed overhead costs per unit comes at Rs.250 and other variable overheads, including the freight cost, add upto Rs.1250 per unit. The payments for both exports and imports are due in six months. The current exchange rate are as follows: Rs./$ 46.90 Rs./Euro 40.40 After six months (at the time of settlement of payments) the exchange rate turns out as follows: Rs./$ 47.90 Rs./Euro 41.25 You are required to: i. Calculate the loss/gain due to transaction exposure. ii. Based on the following additional information calculate the losses/gains due to transaction and operating exposure if the contracted export price per unit is Rs.2700: The current exchange rate changes to Rs./$ : 47.50 Rs./Euro : 40.80.

An Indian importer has a payable of 100,000. The seller has given the Indian importer the following two options. i. Pay immediately with a cash discount of 1% on the payable. ii. Pay after. 3 months with interest at 4% P.a. The borrowing rate for the importer in Rupees is 12% P.a. The following are the exchange rates as on December 02,2002. Rs/ Spot 74.76/80 3 month 38/40 Which of the above two options is advisable for the importer? Solution : Payable 1,00,000 Option 1 Pay now, by availing a cash discount of 1% Amount payable is 99,000 Borrow at 12% for 3 months Amount to be borrowed=99,000 74.80 = 74,05,200 Rupee out flow after 3 months 0.12 =74,05,200 1+ =76,27,356 4 Option 2: Pay after 3 months Payment in foreign currency 0.04 =1,00,000 1 1, 01, 000 4 Obtain forward cover for 1,01,000 at the rate of Rs. 75.20/ Rupee outflow = 75,95,200 Option 2 is beneficial to the Indian importer as the rupee outflow is lower, by Rs.32,156 Strategic Financial Management 25 SANJAY SARAF SIR LEADING, LAGGING, & NETTING PROBLEM - 17 An Indian importer has a payable of 100,000. The seller has given the Indian importer the following two options. i. Pay immediately with a cash discount of 1% on the payable. ii. Pay after. 3 months with interest at 4% P.a. The borrowing rate for the importer in Rupees is 12% P.a. The following are the exchange rates as on December 02,2002. Rs/ Spot 74.76/80 3 month 38/40 Which of the above two options is advisable for the importer