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CMA Final · Strategic Financial Management · The International Financial Environment

Spot EUR/INR is Rs 90.00. One-year interest rates are 8% in India and 4% in the Eurozone. Using covered interest rate parity, the one-year forward EUR/INR rate is closest to:

Covered interest parity gives forward equals spot times the ratio of one plus the domestic rate to one plus the foreign rate. Here 90 x 1.08/1.04 is about Rs 93.46, so the euro trades at a forward premium, and the closest option is Rs 93.60.

  1. ARs 86.54
  2. BRs 93.60Correct
  3. CRs 90.00
  4. DRs 97.20

Explanation

Forward = 90 x (1.08/1.04) = 90 x 1.038462 = 93.46. Checking: 90 x 1.038462 = 93.4615, so the nearest option is 93.60? That is not exact; recompute with the stated option set: 93.46 is closest to 93.60 among the options, while 86.54 inverts the ratio, 90.00 ignores the differential and 97.20 adds the full 8% to spot.

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