Reading 18: Currency Exchange Rates-LOS g习题精选 domestic, discount, interpret, 2010, class

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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.

土豆妮

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.

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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.

Forward_DC/FC = Spot_DC/FC × [(1 + r_domestic) / (1 + r_foreign)]

This condition is the formal representation of interest rate parity.

Here, Forward_DC/FC = 2_DOM/FOR × [(1 + 0.12) / (1 + 0.15)] = 2_DOM/FOR × 0.97391 = 1.94783 or 1.948.

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

r_domestic ? r_foreign = [( Forward_DC/FC ? Spot_DC/FC) / Spot_DC/FC]
where = is "approximately equal to"

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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.

土豆妮

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.

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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.

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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%.

土豆妮

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%.

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

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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.

土豆妮

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.

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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%.

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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.

土豆妮

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.

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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.