CMA Final · Strategic Financial Management · Foreign Exchange Market
Spot USD/INR is 82.00. The 3-month forward is quoted at 82.60. What is the annualised forward premium on the USD in percent, using simple interest?
The annualised forward premium on the dollar is about 2.93%. The three-month premium is 0.60 divided by 82, or 0.73%, and multiplying by four to annualise gives 2.93%. Leaving it unannualised is the common error.
- A2.93%Correct
- B0.73%
- C2.44%
- D3.12%
Explanation
Premium = (82.60 - 82.00)/82.00 = 0.7317% for 3 months. Annualised = 0.7317 x 12/3 = 2.927%, about 2.93%. The 0.73% figure is not annualised.
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