Accounts Notes: Management Accounting and Financial Analysis

Sunday 20 March 2011

Management Accounting and Financial Analysis

1. Direct Quote (eg) 1$ = Rs.49

2. Indirect Quote (eg) Rs.1 = .0204$

3. TT Rate = Telegraphic Transfer Rate

4. TOM Rate = Tomorrow Rate

5. Spot Rate = Today’s rate. Normally it will be 3td day rate from TT Rate.

Direct Quote is used in all country except UK where indirect quote is used.

Offer Rate = Selling Rate

Spread Rate = Offer Rate – Bid Rate

Spread Rate (%) = Offer Rate – Bid Rate * 100 (111lr to that of NP Ratio)
Offer Rate

Swap points is ascending stage it is at premium. If it is descending stage it is at discount.

If it is said as INR/$ then the meaning is
• Numerator factor = Local Currency = INR
• Denominator factor = Foreign Currency = $

Forward Quotation (%) (I.e. Premium/Discount expressed at annualized %)
= Forward Rate – Spot Rate * 12 * 100 (in months)
Spot Rate n

= Forward Rate – Spot Rate * 365 * 100 (in days)
Spot Rate n

If the quote is direct or Indirect is to be found and the relation is with £ (pound) both direct and Indirect quote is to be said.

Maturity Value = P (1+r) n

Interest Rate Parity:
i) Domestic Rate < Foreign Rate + Forward Premium / Discount (In this case invest in foreign currency) ii) Domestic Rate > Foreign Rate + Forward Premium / Discount
(In this case invest in Domestic Currency)

Forward Rate: It is rate negotiated for the delivery to be made / taken on a future date for present transaction.

Future spot rate: It is actual rate prevailing on the agreed future date.

Other points:-
• Currency country which has less Interest rate will have forward rate at premium and vice versa
• If two rates ie.20.23 / 35 is given then highest rate is offer rate, lowest rate is bid rate.
• If INR / DG is given and we have to DG / INR then it is 1 / (INR / DG)
• 1 / (Bid Rate) = Offer Rate.
• 1 / (Offer Rate) = Bid Rate.

Interest rate swap: - Generally interest rate differs from company to company because of their grade (reputation) and rates can be fixed rates or floting rate. If there is 2 company under different grade and different fixed / floating rate can gin advantage by reducing their interest rate by “Interest rate swap”.

In this if ‘Company A’ wants to borrow at floating rate and ‘Company B’ wants to borrow and fixed rate, then interest rate swap is applied by which company A borrows at floating Rate of company B and company B borrows at fixed rate of company A. By this swap one company gains and other company losses. Net gain is splited between two companies so that the two companies benefits by paying lower interest rate for their barrowing.

To look at the problem quickly the theory followed in “Difference in fixed rate interest of two companies is profit” and “Difference in floating rate interest of two companies is loss”. Then net gain / loss are found.