bapswarrior

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) 6.250%.

C) 6.060%.

---

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

bapswarrior

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%.

bapswarrior

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) 1.005%.

C) 2.012%.

---

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

bapswarrior

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) 1.150%.

B) 1.146%.

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%

bapswarrior

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) premium of USD 0.0045.

B) rate of USD 0.3075.

C) discount of USD 0.0045.

---

USD 0.3120 – USD 0.3075 = USD 0.0045 premium.

bapswarrior

Assume the 1 year USD:EUR forward rate is 0.89348, the German interest rate is 3.38 percent, and the U.S. interest rate is 1.90 percent. If interest rate parity (IRP) holds, the USD:EUR spot rate is approximately:

A) 0.91204.

B) 1.56670.

C) 0.88069.

---

Interest rate parity is given by:

Forward FCC = Spot FCC × [(1 + rdomestic) / (1 + rforeign)], or alternatively
Spot FCC = Forward FCC × [(1 + rforeign) / (1 + rdomestic)] = 0.89348 × (1.0190 / 1.0338) = 0.88069

Note that in this question, the dollar is the foreign currency and the Euro is the domestic currency.

bapswarrior

Assume that the domestic nominal rate of return is 4% and the foreign nominal rate of return is 5%. If the current exchange rate is FCC 0.400, the forward rate consistent with interest rate parity is:

A) 0.396.

B) 0.400.

C) 0.318.

---

F/S= (1 + rD) / (1 + rF) where the currency is quoted as FCC
F = (1.04/1.05)(0.400) = 0.396

bapswarrior

Given a forward exchange rate of 5 DC/FC, a spot rate of 5.102 DC/FC, domestic interest rates of 8%, and foreign rates of 10%, which of the following statements is CORRECT based on the approximation formula?

A) Arbitrage opportunities do not exist.

B) Arbitrage opportunities exist.

C) Borrow local currency and lend foreign currency.

---

If (rD − rF) is approximately equal to the forward premium, which is (Forward D/F) − Spot(D/F) / Spot(D/F), then no arbitrage opportunities exist.
0.08 − 0.10 ≅ (5 − 5.102) / 5.102.
-0.02 ≅ -0.01999.

bapswarrior

Suppose the Argentina peso is at a 1-year forward premium of 4% relative to the Brazilian real and that Argentina’s 1-year interest rate is 7%. If interest rate parity holds, then the Brazilian interest rate is closest to:

A) 6.60%.

B) 11.00%.

C) 3.00%.

---

According to interest rate parity the currency with the lower interest rate is expected to appreciate so the Argentina rate of 7% is approximately 4% less than the Brazilian rate of 7 + 4 = 11%.

bapswarrior

Given the following information, what is the forward exchange rate implied by interest rate parity?

• U.S. interest rate = 9%.
• North Korea interest rate = 10%.
• Spot rate = 1.65 KPW/$.

A) 0.612 KPW/$.

B) 1.635 KPW/$.

C) 1.665 KPW/$.

Forward rate (DC/FC) = Spot Rate (DC/FC) × [(1 + domestic rate) / (1 + foreign rate)],
Forward rate = 1 / 1.65 (KPW/$) × (1.09 / 1.10) = 0.60055 $/KPW, or 1.665 KPW/$.
Alternatively, forward rate = 1.65 (KPW/$) × (1.10 / 1.09) = 1.665 (KPW/$).