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CMA Final · Strategic Financial Management · The International Financial Environment

Spot USD/INR is 80.00. One-year interest rates are 8% in India and 4% in the US (annual compounding). As per interest rate parity, the one-year forward USD/INR rate (to the nearest paisa) is:

Interest rate parity gives forward equal to spot multiplied by the ratio of one plus the Indian rate to one plus the US rate: 80 × 1.08/1.04 = ₹83.08. The rupee trades at a forward discount because Indian interest rates are higher.

  1. A₹83.08Correct
  2. B₹80.00
  3. C₹76.92
  4. D₹83.20

Explanation

Forward = 80 × (1.08/1.04) = 80 × 1.038462 = ₹83.08. The simple difference method (80 × 1.04 = 83.20) wrongly subtracts rates linearly, and ₹76.92 inverts the ratio.

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