📝 QUESTION 1 — Foreign exchange quotes, forward

premium/discount, forward points, examples &

interpretation
(Write as: Definition → Types → How to quote → Forward
premium/discount → Calculation method → Example → Tricky
points → Conclusion.)
INTRO (Definition)
The foreign exchange market is the marketplace where one
currency is exchanged for another. Rates are determined by
demand & supply of currencies and quoted either in a direct
quote or an indirect quote depending on which currency is
taken as base/counter.

1. Exchange-rate quotations — direct & indirect (clear,

short)
 Direct quote (for domestic writers) — domestic
currency per unit of foreign currency.
o Example (India): 1 USD = 76.00 INR. Here USD is
the base (left), INR is the counter (right).
 Indirect quote — foreign currency per unit of domestic
currency.
o Example (India): 1 INR = 0.013 USD.
 Base & counter: left-hand currency is the base; right-
hand is the counter. Be explicit in the answer which is
domestic/foreign.
Exam tip (tricky): Always state which is base & which is
counter. Examiner often gives a pair and asks “identify
direct/indirect” — show both forms quickly.

2. Spot vs Forward
  Spot: immediate exchange (usual settlement T+2).
Example: paying $6,800 for £4,000 at $1.70/£ (spot).
 Forward: agreed exchange rate today for settlement on a
future date. Used to hedge and remove uncertainty.

3. Forward premium / forward discount — concept &

formula
 Forward premium: when Forward rate > Spot rate. It
indicates that the currency on the left (the quoted
currency, depending on quote type) is expected to be
more expensive in the forward market. Unit text: "Forward
premium occurs when the forward exchange rate is
quoted higher than the spot exchange rate."
 Forward discount: when Forward rate < Spot rate.
 Percentage premium/discount (exam-friendly formula):
[
\text{Forward premium (%)} = \frac{F - S}{S} \times 100
]
where (S) = Spot, (F) = Forward (same quote convention).
If result negative → forward discount.
Forward points (practical quoting): many forwards are
shown as “points” added/subtracted to spot: 1 forward point =
1/10,000 of the spot (for pairs quoted to 4 decimals).
Add/subtract these to compute forward.

4. How to compute forward rate (practical method used

in exams)
Covered interest parity (approx) for a 1-year contract (use
this in calculations):
If the quoted rate is X (foreign per domestic or domestic per
foreign), use the correct parity form. Example (when quote is
base currency / counter currency = base per counter):
[
F = S \times \frac{1 + i_{\text{base}}}{1 + i_{\
text{counter}}}
]
(Always define which interest rate belongs to which
currency before plugging in.)

5. Worked example (exam-style) — CAD / NAD example

from your notes
Given: Spot CAD/NAD = 8.96. Annual interest rates: CAD =
4%, NAD = 7%. (This example is in your UNIT 1 notes.)
Compute 1-year forward (step by step):
1. Write formula: (F = S \times \dfrac{1 + i_{CAD}}{1 +
i_{NAD}}).
2. Substitute: (F = 8.96 \times \dfrac{1.04}{1.07}).
3. Compute ratio: (1.04 \div 1.07 = 0.9719626168) (work it
digit by digit in exam).
4. Multiply: (8.96 \times 0.9719626168 = 8.7088) (approx).
So Forward ≈ 8.7088.
5. Forward premium/discount %: ((8.7088-8.96)/8.96 \
times100 = -2.80%). → Forward discount of 2.80%
(CAD is at a discount vs NAD in the forward).
Interpretation (write this): since (F<S), CAD is expected to
be cheaper vs NAD in one year (or NAD expected to appreciate
vs CAD). This reflects the higher NAD interest rate (7% > 4%)
— money markets discount the higher-yield currency.
Exam tip (tricky): clearly state the quote convention
(CAD/NAD) and specify which currency has which interest rate
before computing. Many students swap rates accidentally.

6. Short answer checklist (conclusion)

 Define direct/indirect and base/counter.
  Show formula for forward premium and compute %
(F−S)/S.
 Use parity formula carefully — state interest rates and
currency mapping.
 End with interpretation in words (who is appreciating/
depreciating).

📝 QUESTION 2 — ECB (Eligibility & Pricing), Features,

advantages/disadvantages; ADR/GDR eligibility &
countries; NRI bank accounts (types) and NRE vs NRO
(This is heavy: write with subheadings, tables and examples —
examiners like structured answers.)
INTRO (definition in one line)
External Commercial Borrowings (ECB) are commercial
loans (bank loans, supplier/buyer credit, bonds, etc.) raised
from non-resident lenders with a minimum average maturity
(usually 3 years) used for permissible end-uses in India.

A — ECB: Eligibility (who can borrow) — concise bullets

Automatic Route (typical eligible borrowers) — corporates
(including hotel, hospital, software), NBFCs-IFC/AFC (with
conditions), SIDBI for on-lending to MSMEs, SEZ units (subject
to restrictions), NGOs/MFIs engaged in microfinance (with due
diligence), etc. Individuals and typical trusts are not eligible.
Recognised lenders (eligible lenders): international banks,
international capital markets, multilateral institutions (IFC,
ADB), export credit agencies, foreign collaborators, suppliers,
and direct/indirect foreign equity holders meeting minimum
equity criteria.
Minimum equity rule (important — tricky): For ECB from a
foreign equity holder, a minimum paid-up equity holding is
required (commonly 25% rule + liability:equity ratio checks) —
state this explicitly if asked.
B — Pricing: All-in-cost ceilings, maturities & limits
(write numbers)
 All-in-cost ceiling (example from your notes): Average
maturity 3–5 years → LIBOR + 350 bps; More than 5 years
→ LIBOR + 500 bps (all-in cost excludes certain domestic
fees). This is examiner-heavy content — quote exact
numbers from your notes if asked.
 Maturities: ECB up to USD 20m: min avg maturity = 3
years; above USD 20m up to USD 750m: min avg maturity
= 5 years. Note: Services sector often has lower ceiling
(USD 200m) — quote that if relevant.
 Overall annual cap: typical upper limit in notes: USD
750 million (corporates) and USD 200 million for
specified service sectors in a FY — mention both.
Exam tip (tricky): If the question asks “pricing” mention all-
in-cost, LIBOR basis, and that swap cost + margin is used to
compare fixed rate loans.

C — End-uses permitted & NOT permitted (short table

style)
Permitted (examples): import of capital goods, infrastructure
projects, on-lending to infrastructure, financing of projects in
SEZs, interest during construction (IDC) for infrastructure
projects, on-lending to SHGs via MFIs, refinancing for spectrum
payments subject to conditions.
Not permitted: for on-lending/investment in capital markets,
real estate, general corporate purposes (except special cases),
acquisition of land, issuance of certain bank guarantees linked
to ECBs.

D — Security, procedure & compliance (short bullets)

  Security: immovable/movable assets, pledge of shares,
charge over current & future assets, escrow accounts,
corporate/personal guarantees — AD Category-I banks
must satisfy RBI conditions.
 Procedure: submit Form 83 (for LRN) via designated AD
bank; borrower must get Loan Registration Number
(LRN) from RBI before drawdown; submit ECB-2 returns
monthly. Mention this succinctly.

E — Features, advantages & disadvantages (exam-style

paragraph + bullets)
Key features: multi-currency borrowing, minimum maturity
norms, two routes (automatic/approval), recognized lenders,
all-in-cost ceilings.
Advantages (write as bullets):
 Access to cheaper or longer maturity foreign funds.
 Can finance large projects & capital imports.
 Flexibility of instruments (bonds, buyer’s credit, loan
syndication).
Disadvantages / Risks:
 Exchange rate risk (foreign currency exposure).
 Higher compliance (RBI forms, LRN, reporting).
 Restrictive end-use rules and possible conditionalities.
Exam trap (tricky): If asked advantages include “cheaper
funds” but immediately also state exchange-rate risk —
examiners love balanced answers.

F — ADR / GDR — Eligibility, where issued & short

procedure (concise)
  ADR (American Depository Receipt): negotiable
certificate issued by a U.S. bank, denominated in USD,
representing shares of a non-US company and traded on
U.S. exchanges (NYSE/NASDAQ). ADRs are retail-oriented
and subject to strict SEC disclosure.
 GDR (Global Depository Receipt): issued by an
international depository, can be listed on non-US
exchanges (London, Luxembourg); often targeted at
institutional investors and traded globally.
 Eligibility & procedure (short): Company deposits
shares with Overseas Depository Bank (ODB) → ODB
issues depository receipts → receipts listed & offered to
foreign investors. Some issues require prior government
approval (e.g., GDR approvals from Ministry/FIPB in older
rules) — mention if asked.
Tricky point: Examiner may ask differences — use a compact
comparison chart (ADR = US market, retail, higher disclosure;
GDR = global/European market, institutional, lighter
disclosure).

G — NRI accounts: types, eligibility & NRE vs NRO (table

+ example)
Types: NRE (Non-Resident External), NRO (Non-Resident
Ordinary), FCNR(B) (Foreign Currency NRE Fixed deposits).
Eligibility: Person becomes NRI generally after being outside
India for specified days in a year (notes show 120 days / 4-year
rule per recent treatment; quote from your notes). Always state
the residency condition before stating account eligibility.
Key differences (short table — write in exam):
 Currency: NRE & NRO held in INR; FCNR in foreign
currency.
  Source of funds: NRE = foreign earnings; NRO = Indian
earnings; FCNR = foreign earnings (kept in foreign
currency).
 Taxation: NRE interest tax-free; NRO interest taxable;
FCNR interest tax-free.
 Repatriation: NRE/FCNR fully repatriable; NRO
repatriation subject to limit (USD 1m p.a. after taxes) and
RBI rules.
Example (one line): If an NRI working in UAE remits salary,
deposit into NRE → can be repatriated freely and interest is tax-
free (good for savings & repatriable investments). If he has
rental income in India → deposit into NRO (taxable; repatriation
limits apply).

FINAL SHORT CONCLUSION (for examiner)

ECB provides access to external funds subject to strict
eligibility, pricing & end-use controls; ADR/GDR are efficient
routes for cross-listing; and NRI accounts (NRE/NRO/FCNR)
differ on repatriability and tax — always mention residency
rules, RBI procedure (LRN/Form-83) and the all-in-cost ceiling
when writing.
(Cite for ECB procedure & LRN: Form-83, LRN & ECB-2 filings in
your notes.)

➕ QUESTION 3 (Numerical — 10 marks)

(Direct exam type: Calculate forward rate &
premium/discount using interest differentials — show
every step.)
Question statement you can write in exam (copy):
“Given Spot CAD/NAD = 8.96, annual interest rates are CAD =
4% p.a. and NAD = 7% p.a.. Calculate the 1-year forward
rate using covered interest parity and compute the forward
premium/discount (%). Interpret the result.” (This exact
example is in your UNIT 1 notes.)
Solution (step-by-step, show calculations exactly):
1. Write formula (CIP form appropriate for CAD/NAD =
units shown):
[
F_{1\text{yr}} = S \times \frac{1 + i_{CAD}}{1 +
i_{NAD}}
]
where (S = 8.96), (i_{CAD}=4%=0.04),
(i_{NAD}=7%=0.07).
2. Compute numerator & denominator (write digits):
o (1 + i_{CAD} = 1 + 0.04 = 1.04)
o (1 + i_{NAD} = 1 + 0.07 = 1.07)
3. Compute ratio (carry out division carefully):
o (1.04 \div 1.07 = 0.9719626168224299) (carry 10
digits; in exam round later to 4 decimals).
4. Multiply by spot:
o (F = 8.96 \times 0.9719626168 = 8.7087850467).
5. Round to a sensible number (4 decimals for
currency):
o Forward ≈ 8.7088.
6. Compute forward premium / discount (%) using ((F -
S)/S \times 100):
o (F - S = 8.7088 - 8.96 = -0.2512).
o ((F - S)/S = -0.2512 / 8.96 = -0.02803738317757).
o Multiply by 100 → -2.8037% → Forward discount ≈
2.80%.
7. Interpretation (1–2 lines): Since forward < spot, CAD
trades at a forward discount vs NAD; NAD is expected to
 appreciate vs CAD over one year. The discount aligns with
the higher NAD interest rate (7% > 4%).
(Marks note for examiner) — show each arithmetic step,
state formula, substitute numbers, round appropriately, and
conclude: that structure fetches full marks.

🧠 Exam quick-cheat summary (copy into the last page)

 Direct/Indirect — always write base & counter.
 Forward premium (%) = ((F-S)/S \times100).
 CIP (1-yr): (F=S \times \dfrac{1+i_{base}}
{1+i_{counter}}) — label rates before plugging.
 ECB: Eligibility = corporates, NBFCs (IFC/AFC with limits),
SEZ, MFIs; All-in-cost ceilings = LIBOR + 350 bps (3–5
yrs) / +500 bps (>5 yrs) — state numbers.
 NRE vs NRO: NRE = foreign income, tax-free interest,
fully repatriable; NRO = India income, taxable, repatriation
limit USD 1m p.a. (after taxes).
 ADR/GDR: ADR = US depositary receipt (NYSE/NASDAQ),
retail; GDR = global (London/Luxembourg), institutional.

If you want, I’ll now:

 format these answers into three exam sheets (clean,
single-column, ready to handwrite), or
 convert the numerical problem into 2-part subquestions
(short vs long) for practice.
Tell me which and I’ll produce the formatted page layout you
can print or screen-read before the exam. Good luck — you’ll do
it. 💪