Question

Prajwal is an Indian businessman and he wanted to borrow Rs 750,000 for an urgent investment need from a friend who lives in Australia. His friend agreed to send the above amount of money in Indian rupees and said that interest will not be charged for the loan. However, Prajwal promised to repay the loan in Australian dollars after six-months with a forward currency rate of Rs55/$.

I. What is the amount of money in dollars that his friend needs pay to an authorised currency exchanger in Australia with $15 administration fee in order to transfer the loan to Prajwal? (Suppose the spot exchange rate at the time of sending money is Rs52/$).

II. What is the amount of money in Indian rupees that Prajwal needs pay to an authorised currency exchanger in India after six months with Rs 250 administration fee in order to settle his loan?

III. What is the cost of Prajwal’s bank loan in Indian rupees?

IIII. What will be the interest rate Prajwal would have to pay if he borrowed the Rs 750,000 from an Indian bank?

Answer 1

1 In the given case prajwal want rs 750000 and his friend promised him to pay rs 750000 but since friend has with himself $ therefore first he has to convert it into RS by using $ at spot rate of Rs 52/$

$ needed to convert into Rs 750000 at spot rate of Rs 52/$ = 750000/52 = $14423.

In addition to this conversion, he will have to pay to authorised exchanger $ 15 also.

Therefore total payment that his friend need to pay authorised exchanger = $14423+$15 = $14438.

II . Now prajwal has to pay the sum that he has borrowed from his friend that is $14438 so that his friend get what he paid to exchanger. Pranjwal has Rs, to convert into $ he took forward rate of rs 55/$. Therefore total Rs. That he has to pay = 14438x55=794090+250

Therefore total amount that prajwal has to pay to authorised exchanger = Rs 794340.

III cost of prajwal's loan in indian rupees will be difference between what he paid and what he got i.e. Rs 794340-Rs 750000 = Rs 44340.

IIII Based on the spot rate se can calculate interest rate aa forward rate - spot rate/spot rate

Therefore [(55-52)/52]x100 = 5.77%.