CMA Final · Strategic Financial Management · The International Financial Environment
Indian one-year interest rate is 8% and the US one-year rate is 4%. Spot is Rs 80 per USD. As per interest rate parity, what is the approximate one-year forward rate (Rs per USD, using the exact formula)?
The interest rate parity forward rate is Rs 83.08 per dollar. Multiply spot of Rs 80 by the ratio of the rupee growth factor 1.08 to the dollar growth factor 1.04. The higher Indian interest rate means the rupee trades at a forward discount.
- ARs 80.00
- BRs 83.08Correct
- CRs 83.20
- DRs 76.92
Explanation
Forward = 80 x 1.08/1.04 = 80 x 1.038462 = Rs 83.08. Rs 83.20 uses the simple difference (80 x 1.04), which ignores compounding on the dollar rate. Rs 76.92 inverts the ratio.
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