Question

1. The spot rate of the US dollar is 70/USD and the three month forward rate is INR 72/USD. Is the rupee trading at discount t or premium?
2. The 90-day interest rate is 1.5% in the US and 4% in India. The current spot exchange rate is INR 70/USD. What will be the 90-day forward rate? (CIP)
3. The current spot rate for the JPY is INR 1.55. The expected inflation is 8% in India and 1.5% in Japan. What is the expected spot rate of the JPY a year hence? (PPP)
4. In India the interest rate on a 1-year loan is 14% and expected inflation is 8%. The expected inflation in Thailand is 10%. What should be the interest rate of a 1-year loan in Thailand? (IFE)
5. What is the implied exchange rate between AED and INR? The spot price is 34,060/10gms in India. How can we explain the discrepancies? The spot rate is INR 18.97/AED.

6. The spot rate is INR 65/USD. And the one year expected spot rate is 70/USD. The expected inflation in India is 10% what is the expected inflation in the US?
7. The annual interest rates in India and the US are 11.43% and 4% respectively. The current exchange rate is INR70/USD and the one year forward rate is INR 75/USD. Where should an Indian investor invest? If the forward rate is INR 76/USD then will your answer change?
8. BI, an Indian multinational company is evaluating an overseas investment proposal. BI is a leading bulk drugs exporter and is considering building a plant in the UK. The project cashflows are given below and the investment costs GBP 100mn. The current spot exchange rate is INR 87.45/GBP. The interest rate in India is 10% and in the UK is 6%. BI expects to earn 20% return on similar project in India. Should BI take up this project?

Time	0	1	2	3	4	5
CF (mn GBP)	100	15	40	50	30	20

Time	0	1	2	3	4	5
CF (mn Swazi Lilangeni)	1840	276	736	920	552	368

Answer 1

You have asked 8 unrelated questions in a single post. I have addressed first 4 of them. Please post balance questions separately.

The spot rate of the US dollar is 70/USD and the three month forward rate is INR 72/USD. Is the rupee trading at discount t or premium?

Spot Price of INR today = 1/70 = USD  0.0143; Forward price for INR = USD 1/72 = USD  0.0139

Since Forward price is less than spot, Rupee is trading at forward discount.

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The 90-day interest rate is 1.5% in the US and 4% in India. The current spot exchange rate is INR 70/USD. What will be the 90-day forward rate? (CIP)

90 day forward rate (INR / USD) = Spot rate (INR / USD) x (1 + i_INR x 90 / 360 ) / (1 + i_USD x 90 / 360) = 70 x (1 + 4%) / (1 + 1.5%) = INR 70.44 / USD

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The current spot rate for the JPY is INR 1.55. The expected inflation is 8% in India and 1.5% in Japan. What is the expected spot rate of the JPY a year hence? (PPP)

Expected spot rate a year = Spot rate x (1 + i_India) / (1 + i_Japan) = INR 1.55 x (1 + 8%) / (1 + 1.5%) = INR 1.65

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In India the interest rate on a 1-year loan is 14% and expected inflation is 8%. The expected inflation in Thailand is 10%. What should be the interest rate of a 1-year loan in Thailand? (IFE)

(1 + interest rate_India) / (1 + inflation_India) = (1 + interest rate_Thailand) / (1 + inflation_Thailand)

Hence, (1 + 14%) / (1 + 8%) = (1 + interest rate_Thailand) / (1 + 10%)

Hence, interest rate_Thailand = 1.14 / 1.08 x 1.10 - 1 = 16.11%