CMA Final · Strategic Financial Management · Foreign Exchange Market
Spot USD/INR is 83.00. The 6-month forward rate is 84.66. Calculate the annualised forward premium on the USD, using simple annualisation, based on spot.
The annualised forward premium on the dollar is 4.00%. The six-month premium is 1.66 divided by 83, which is 2%, and multiplying by 12/6 gives 4% a year. Stopping at 2% would leave the figure unannualised.
- A2.00%
- B1.00%
- C4.00%Correct
- D3.95%
Explanation
Premium for 6 months = (84.66 - 83.00)/83.00 = 1.66/83 = 2.00%. Annualised = 2.00% x 12/6 = 4.00%. The 2.00% option forgets to annualise.
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