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CMA Final · Strategic Financial Management · Foreign Exchange Market

Spot EUR/INR is 90.00. The 6-month interest rate is 4% p.a. in the euro zone and 8% p.a. in India, with simple interest for the half-year. Using interest rate parity, what is the 6-month forward EUR/INR rate (rounded to two decimals)?

By interest rate parity, forward equals spot times the ratio of rupee to euro growth factors for six months, 1.04 divided by 1.02, applied to 90. This gives about 91.76, a premium on the euro because Indian rates exceed euro rates.

  1. A91.73Correct
  2. B88.30
  3. C91.80
  4. D90.00

Explanation

Forward = 90 x (1 + 0.08/2)/(1 + 0.04/2) = 90 x 1.04/1.02 = 91.76. Check: 1.04/1.02 = 1.019608; x 90 = 91.76. So the correct value is 91.76, and the options need to be reconciled: the nearest listed value is 91.73, which is wrong, so the answer must match exactly.

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