Reading 18: Currency Exchange Rates-LOS g习题精选 interpret, domestic, 2011, class, discount

土豆妮

Session 4: 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 FCC 2.000. The foreign return is 15% and the domestic return is 12%. Which of the following is closest to the forward exchange rate?

A) 0.487.

B) 2.576.

C) 1.948.

---

 

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_FCC = Spot_FCC × [(1 + r_domestic) / (1 + r_foreign)]

This condition is the formal representation of interest rate parity.

Here, Forward_FCC = 2.000 × [(1 + 0.12) / (1 + 0.15)] = 2.000 × 0.97391 = 1.94783 or about 1.948.

土豆妮

The 90-day forward rate is EUR:USD 0.9420. Given a forward premium of EUR:USD 0.0027, what is the annualized percentage forward discount or premium for the Euro?

A) 1.146%.

B) 1.150%.

C) 11.500%.

---

Since we have a forward premium, we have to subtract it from the forward rate to get the spot rate of EUR:USD 0.9393. (Note that the $ is weaker in the forward market as it takes more dollars to buy one Euro.)

The annualized percentage forward premium = (0.0027 / 0.9393) × (360 / 90) × 100 = 1.150%

土豆妮

The spot and 30-day forward rates for the Australian dollar (AUD) are USD 0.3075 and USD 0.3120, respectively. The AUD is selling at a forward:

A) rate of USD 0.3075.

B) premium of USD 0.0045.

C) discount of USD 0.0045.

---

USD 0.3120 – USD 0.3075 = USD 0.0045 premium.

土豆妮

The forward rate on a 90-day contract is USD:FC 5 and the spot is USD:FC 4. The USD is trading at a forward:

A) discount of 1.0.

B) premium of 1.0.

C) premium of 0.8.

---

A foreign currency is at a forward premium if the forward rate expressed in dollars is above the spot rate. Forward premium = forward rate – spot rate = 5 ? 4 = 1.

土豆妮

If the forward rate expressed in domestic currency units is above the spot rate, then the foreign currency is at a:

A) forward premium.

B) spot discount.

C) forward discount.

---

A foreign currency is at a forward premium if the forward rate expressed in domestic currency is above the spot rate. Forward premium = forward rate – spot rate.

土豆妮

Today, the spot rate on Japanese yen is $0.008000 and 180-day forward yen are priced at $0.008250. The annualized forward premium is:

A) 3.125%.

B) 6.060%.

C) 6.250%.

---

Forward premium = ($0.008250 ? $0.008000) / $0.008000 × (360 / 180) = 0.0625 = 6.25%.

土豆妮

Isaac Long is an English investor. He notices the 90–day forward rate for the Norwegian kroner is GBP 0.0859 and the spot rate is GBP 0.0887. Long calculates the annualized rate of the kroner to be trading at a:

A) premium of 9.478%.

B) discount of 12.63%.

C) premium of 21.17%.

---

[(forward rate ? spot rate) / spot rate] × (360 / number of forward contract days) = [(0.0859 ? 0.0887) / 0.0887] × (360 / 90) = ?0.1263 or ?12.63%.

土豆妮

Today, the spot rate on pounds sterling is $0.6960 and 90-day forward pounds are priced at $0.6925. The annualized forward discount is:

A) 2.022%.

B) 2.012%.

C) 1.005%.

---

Forward discount = ($0.6925 ? $0.6960) / $0.6960 × (360 / 90) = -0.02012

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) 6.25%.

B) 1.00%.

C) 1.56%.

---

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

土豆妮

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

A) differential of 275 points.

B) premium of $0.073.

C) discount 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%.