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Reading 18: Currency Exchange Rates-LOS g习题精选

Session 4: Economics: Economics for Valuation
Reading 18: Currency Exchange Rates

LOS g: Calculate and interpret a forward discount or premium and express it as an annualized rate.

 

 

 

The spot exchange rate is 2 D/F. The foreign return is 15% and the domestic return is 12%. What should the forward exchange rate be?

A)
1.948.
B)
0.487.
C)
2.576.

The spot exchange rate is 2 D/F. The foreign return is 15% and the domestic return is 12%. What should the forward exchange rate be?

A)
1.948.
B)
0.487.
C)
2.576.



We want to create a no arbitrage condition. According to the Interest Rate Parity Theorem, if the following condition does not hold, investors will take advantage of interest rate differentials to capitalize on arbitrage opportunities.

ForwardDC/FC = SpotDC/FC × [(1 + rdomestic) / (1 + rforeign)]
This condition is the formal representation of interest rate parity.
Here, ForwardDC/FC = 2DOM/FOR × [(1 + 0.12) / (1 + 0.15)] = 2DOM/FOR × 0.97391 = 1.94783 or 1.948.

Note: We can restate the equation to look like the following:

rdomestic ? rforeign = [( ForwardDC/FC ? SpotDC/FC) / SpotDC/FC]
where = is "approximately equal to"

TOP

The spot and 30-day forward rates for the Euro are $1.1525 and $1.1015, respectively. The Euro is selling at a forward:

A)
discount of 0.956%.
B)
discount of $0.051.
C)
premium of $0.051.

TOP

The spot and 30-day forward rates for the Euro are $1.1525 and $1.1015, respectively. The Euro is selling at a forward:

A)
discount of 0.956%.
B)
discount of $0.051.
C)
premium of $0.051.



Since the forward date is less than the spot rate, the Euro is selling at a forward discount. The amount of the discount is calculated as follows:

Forward Discount = Forward rate – Spot Rate = $1.1015 - $1.1525 = -$0.051.

TOP

If the 90-day forward rate for the CAD is USD 0.6503, and the spot rate is USD 0.6403, then the annualized premium is:

A)
1.00%.
B)
1.56%.
C)
6.25%.

TOP

If the 90-day forward rate for the CAD is USD 0.6503, and the spot rate is USD 0.6403, then the annualized premium is:

A)
1.00%.
B)
1.56%.
C)
6.25%.



 

Annualized premium = [(0.6503 ? 0.6403) / 0.6403] × (360 / 90) = 0.625 or 6.25%.

TOP

The spot and 30-day forward exchange rates for the Swiss franc (CHF) are 0.59984 CHF/USD and 0.62734 CHF/USD, respectively. Relative to the USD, the CHF is selling at a forward:

A)
differential of 275 points.
B)
discount of $0.073.
C)
premium of $0.073.

TOP

The spot and 30-day forward exchange rates for the Swiss franc (CHF) are 0.59984 CHF/USD and 0.62734 CHF/USD, respectively. Relative to the USD, the CHF is selling at a forward:

A)
differential of 275 points.
B)
discount of $0.073.
C)
premium of $0.073.



Forward Discount = Forward rate ? Spot Rate = (1 / 0.62734) ? (1 / 0.59984) = ?$0.073

Since the forward rate is less than the spot rate, the Swiss franc is selling at a forward discount. Note that although in percentage terms, ($0.073 / 1.667) = ?4.38%, when the forward discount is expressed in percentage terms, it is done so on an annualized basis. The correct forward premium expressed as a percentage would be equal to 0.0438 × (360 / 30) = 52.60%.

TOP

A foreign currency is at a forward premium if the forward rate:

A)

expressed in domestic currency is above the spot rate.

B)

expressed in domestic currency is below the spot rate.

C)

expressed in foreign currency/domestic currency is above the spot rate.

TOP

A foreign currency is at a forward premium if the forward rate:

A)

expressed in domestic currency is above the spot rate.

B)

expressed in domestic currency is below the spot rate.

C)

expressed in foreign currency/domestic currency is above the spot rate.




 

A foreign currency is at a forward premium if the forward rate expressed in domestic currency is above the spot rate. A forward discount exists if the forward rate is below the spot rate.

TOP

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