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CMA Final · Strategic Financial Management · Foreign Exchange Risk Management

An Indian exporter expects to receive USD 200,000 in 3 months. The spot rate is Rs 83.00/USD. Three-month interest rates are 8% p.a. in India and 4% p.a. in the US (simple, quarterly). Using interest rate parity, what is the 3-month forward rate (Rs/USD), to the nearest paisa?

The forward rate is Rs 83.82 per USD. Under interest rate parity the spot rate is multiplied by the ratio of rupee to dollar growth factors for the period, 1.02 divided by 1.01, giving 83 x 1.0099, which is about Rs 83.82.

  1. ARs 83.00
  2. BRs 83.33
  3. CRs 83.82Correct
  4. DRs 82.18

Explanation

Forward = 83 x (1 + 0.08/4)/(1 + 0.04/4) = 83 x 1.02/1.01 = 83 x 1.009901 = Rs 83.82. Rs 83.33 results from simply adding the 4% differential for a full year-fraction incorrectly (83 x 1.004), and Rs 82.18 inverts the ratio.

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