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CMA Final · Strategic Financial Management · The International Financial Environment

A currency trader sees a one-year interest rate of 8% in India and 3% in the US. Spot is ₹80 per USD. Under interest rate parity, the one-year forward rate (nearest paisa) is:

Interest rate parity sets forward equal to spot times the ratio of one plus the domestic rate to one plus the foreign rate. For 80, 8% and 3% this is 80 × 1.08/1.03, about ₹83.88, a forward premium on the dollar.

  1. A₹83.70Correct
  2. B₹84.00
  3. C₹76.30
  4. D₹80.00

Explanation

Forward = 80 × 1.08/1.03 = 80 × 1.048544 = ₹83.88. Check: 1.08/1.03 = 1.04854; 80 × 1.04854 = 83.88. Using the simple difference method (5%) gives ₹84.00, which is the approximation distractor; the exact IRP value is ₹83.88.

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