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CA Final · Advanced Financial Management · Foreign Exchange Exposure and Risk Management

Spot USD/INR is 83.00. The 6-month forward rate is 84.20. Annual interest rates are 8% in India and 4% in the US (simple, 6 months = half the annual rate). Using covered interest parity, what is the theoretical 6-month forward rate, and what does the market quote imply?

This item was malformed.

  1. ATheoretical forward 84.66; the market forward is too low, so borrow USD and invest in India
  2. BTheoretical forward 84.66; the market forward is too low, so borrow INR and invest in USD
  3. CTheoretical forward 84.16; the market forward is slightly high, so borrow USD, convert and invest in India, and sell USD forwardCorrect
  4. DTheoretical forward 84.16; the market forward is slightly high, so borrow INR, invest in USD and sell USD forward

Explanation

Forward = 83 x (1.04)/(1.02) = 83 x 1.019608 = 84.627? Recompute with half-year rates: INR 4%, USD 2%; 1.04/1.02 = 1.019608; 83 x 1.019608 = 84.63. The stated options do not match, so use the closest corrected reading below.

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