Reading 18- LOS f ～ Q1－5 black, forward

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1．e spot and 30-day forward rates for the Australian dollar (AUD) are USD0.3075 and USD0.3120, respectively. The AUD is selling at a forward:

A)   premium of USD0.0045.

B)   discount of USD0.0045.

C)   rate of USD0.3075.

D)   neither a premium nor a discount.

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

A)   0.487.

B)   1.948.

C)   0.513.

D)   2.576.

3．e 90-day $/Euro forward rate is 0.9420 $/Euro. Given a forward premium of 0.0027 $/Euro, what is the annualized percentage forward discount or premium for the Euro?

A)   11.500%.

B)   1.150%.

C)   1.146%.

D)   1.143%.

4．day, 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%.

D)   1.011%.

5．aac Long is an English investor. He notices the 90–day forward rate for the Norwegian kroner is GBP0.0859 and the spot rate is GBP0.0887. Long calculates the annualized rate of the kroner to be trading at a:

A)   premium of 21.17%.

B)   discount of 9.478%.

C)   discount of 12.63%.

D)   premium of 9.478%.

spaceedu

1．e spot and 30-day forward rates for the Australian dollar (AUD) are USD0.3075 and USD0.3120, respectively. The AUD is selling at a forward:

A)   premium of USD0.0045.

B)   discount of USD0.0045.

C)   rate of USD0.3075.

D)   neither a premium nor a discount.

The correct answer was A)

USD0.3120 – USD0.3075 = USD0.0045 premium.

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

A)   0.487.

B)   1.948.

C)   0.513.

D)   2.576.

The correct answer was B)

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"

3．e 90-day $/Euro forward rate is 0.9420 $/Euro. Given a forward premium of 0.0027 $/Euro, what is the annualized percentage forward discount or premium for the Euro?

A)   11.500%.

B)   1.150%.

C)   1.146%.

D)   1.143%.

The correct answer was B)

Since we have a forward premium, we have to subtract it from the forward rate to get the spot rate of 0.9393 $/Euro. (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) x (360/90) x 100 = 1.150%

4．day, 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%.

D)   1.011%.

The correct answer was B)

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[2008] Session 4 - Reading 18- LOS f ～ Q1－5

2008-5-12 12:30

 

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

5．aac Long is an English investor. He notices the 90–day forward rate for the Norwegian kroner is GBP0.0859 and the spot rate is GBP0.0887. Long calculates the annualized rate of the kroner to be trading at a:

A)   premium of 21.17%.

B)   discount of 9.478%.

C)   discount of 12.63%.

D)   premium of 9.478%.

The correct answer was C)

Calculation: [(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%.