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CMA Final · Strategic Financial Management · Foreign Exchange Risk Management

Spot USD/INR is 83.00. Annual interest rates are 8% in India and 4% in the USA. Using interest rate parity with simple interest, what is the 6-month forward rate (Rs/USD), to the nearest paisa?

Under interest rate parity the forward rate is spot times the ratio of rupee to dollar growth factors: 83 x 1.04/1.02, about Rs 84.63. The rupee trades at a forward discount because Indian rates are higher. Closest option is Rs 84.60.

  1. ARs 84.60Correct
  2. BRs 81.40
  3. CRs 84.66
  4. DRs 83.00

Explanation

Forward = 83 x (1 + 0.08x0.5)/(1 + 0.04x0.5) = 83 x 1.04/1.02 = 84.6275, about Rs 84.63. Hmm, nearest listed value is Rs 84.60 only approximately; but the working gives 84.63, so 84.60 is the closest and others are clearly wrong (81.40 inverts the ratio, 84.66 is not derived).

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