ECB (FOREX) QUESTION CA FINAL SFM
Channel: PAVAN SIR CLASSES
Date: 2020-08-30

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QUESTION
K Ltd. currently operates from 4 different buildings and wants to consolidate its operations into one building which is expected to cost ₹90 crores. The Board of K Ltd. had approved the above plan and to fund the above cost, agreed to avail an 
External Commercial Borrowing (ECB) of GBP 10 m from G Bank Ltd. on the following conditions:
• The Loan will be availed on 1st April, 2019 with interest payable on half yearly rest.
• Average Loan Maturity life will be 3.4 years with an overall tenure of 5 years.
• Upfront Fee of 1.20%.
• Interest Cost is GBP 6 months LIBOR + Margin of 2.50%.
• The 6 month LIBOR is expected to be 1.05%.
K Ltd. also entered into a GBP-INR hedge at 1 GBP = INR 90 to cover the exposure on
account of the above ECB Loan and the cost of the hedge is coming to 4.00% p.a.
As a Finance Manager, given the above information and taking the 1 GBP = INR 90:
(i) Calculate the overall cost both in percentage and rupee terms on an annual basis.
(ii) What is the cost of hedging in rupee terms?
(iii) If K Ltd. wants to pursue an aggressive approach, what would be the net gain/loss for K Ltd. if the INR depreciates/appreciates against GBP by 10% at the end of the 5 years assuming that the loan is repaid in GBP at the end of 5 years?