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CMA Final · Strategic Financial Management · Foreign Exchange Risk Management

Spot is Rs 82.00/USD. The 6-month interest rates are 4% p.a. in the US and 8% p.a. in India, for simple interest. Using interest rate parity, the 6-month forward rate (Rs/USD) is closest to:

By interest rate parity, forward equals spot times (1 + Indian rate for the period) divided by (1 + US rate for the period): 82 x 1.04/1.02, about Rs 83.61, so the nearest option is Rs 83.58. The rupee trades at a forward premium because India has higher interest rates.

  1. ARs 83.58Correct
  2. BRs 80.46
  3. CRs 82.00
  4. DRs 84.46

Explanation

Forward = 82 x (1 + 0.08 x 6/12)/(1 + 0.04 x 6/12) = 82 x 1.04/1.02 = 83.608, approximately Rs 83.61, closest to 83.58? Recompute: 1.04/1.02 = 1.019608; 82 x 1.019608 = 83.608. The nearest option is Rs 83.58. The option of 80.46 inverts the ratio, which is wrong.

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