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CMA Final · Strategic Financial Management · The International Financial Environment

Spot EUR/INR is 90.00. One-year interest rates are 7% in India and 3% in the Eurozone. Using interest rate parity, the one-year forward EUR/INR rate is closest to:

Interest rate parity sets forward equal to spot times the ratio of one plus domestic rate to one plus foreign rate. That gives 90 x 1.07/1.03, about Rs 93.50 per euro. The euro trades at a forward premium because Indian interest rates are higher.

  1. ARs 93.50Correct
  2. BRs 86.64
  3. CRs 90.00
  4. DRs 96.30

Explanation

Forward = 90 x (1.07/1.03) = 90 x 1.038835 = 93.495, about Rs 93.50. Rs 86.64 inverts the ratio (a wrong direction). Rs 96.30 adds the whole 7% instead of the differential.

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