On 1st April 2008, an oil company launched a 4 year financial instrument where, for each unit of financial instrument, the purchaser had to pay a premium of Rs. 1,500 p.a. at the beginning of each of the 4 years. In return, the purchaser would get a lump sum at the end of the 4 year term. the effective rate of return to the purchaser was fixed at 9.5% p.a. from 1st April, 2008 to 1st April, 2010 and 10.5% p.a. thereafter. The Oil Company invested the premiums as and when they were received in an overseas assets which paid a return to the company as per the £ price of one barrel crude oil. The crude oil price (£ per barrel) and exchange rate (Rs. per £) over the past few years are given below: Date - Crude Oil price in £(per barrel) -Exchange rate(Rs.per £) 1st April, 2008- 55- 45.5 1st April, 2009- 53.5- 48.1 1st April, 2010- 70- 50 1st April, 2011- 90- 48 1st April, 2012- 111- 49.5 Calculate the amount of accumulated profit (in Rs.) the Oil Company makes on 1st April, 2012 for each unit of the financial instrument. Assume that the Oil company takes out all the amounts invested in the overseas asset on 1st April, 2012 to meet its liability.
The 1,500Rs received on 01/04/08 is converted to (1500/45.5) = £32.97 On 01/04/2012 this has grown to 32.97*(111/55) = £66.53 The 1,500Rs received on 01/04/09 is converted to (1500/48.1) = £31.19 On 01/04/2012 this has grown to 31.19*(111/53.5) = £64.71 The 1,500Rs received on 01/04/10 is converted to (1500/50) = £30.00 On 01/04/2012 this has grown to 30.00*(111/70) = £47.57 The 1,500Rs received on 01/04/11 is converted to (1500/48) = £31.25 On 01/04/2012 this has grown to 31.25*(111/90) = £38.54 So in total on 01/04/2012 we have 66.53 + 64.71 + 47.57 + 38.54 = £217.35 This converts into 217.35*49.5 = 10,759Rs Then we have to repay our borrowing: For the 1,500Rs received on 01/04/08 we owe 1500*(1.095^2)*(1.105^2) = 2,196Rs For the 1,500Rs received on 01/04/09 we owe 1500*(1.095)*(1.105^2) = 2,006Rs For the 1,500Rs received on 01/04/10 we owe 1500*(1.105^2) = 1,832Rs For the 1,500Rs received on 01/04/11 we owe 1500*1.105 = 1,658Rs In total we owe 2196 + 1987 + 1832 + 1658 = 7,691Rs Giving a profit of 10750 - 7691 = 3,059Rs for each unit sold
