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CFA Level I · CFA Level I Exam · Exchange Rate Calculations

A dealer quotes the spot rate for AUD/EUR (price of one euro in Australian dollars) as 1.6000. The 180-day interest rates are 3.00% per year in the euro zone and 5.00% per year in Australia, both on a 360-day basis and simple interest. The 180-day forward points, scaled by 10,000, are closest to:

The forward points are about +155. Using the 180-day interest factors of 1.025 for Australia and 1.015 for the euro zone, the forward rate is 1.6000 × 1.025/1.015, or about 1.6157. That is roughly 157 points above spot, so +155 is closest.

  1. A+95
  2. B+155Correct
  3. C+198

Explanation

F = 1.6000 × (1 + 0.05×180/360)/(1 + 0.03×180/360) = 1.6000 × 1.025/1.015 = 1.6157. Points = 0.0157 × 10,000, about +157, closest to +155. The +198 option uses full annual rates: 1.6 × 1.05/1.03 = 1.6311, minus spot is 311, not 198, so it is a mistake from using only a rate difference of 2% times 1.6. The +95 option comes from halving the wrong difference.

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