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CMA Final · Strategic Financial Management · Foreign Exchange Market

Spot USD/INR is 83.00. The one-year interest rate is 7% in India and 3% in the USA. Using interest rate parity with annual compounding, the one-year forward USD/INR rate is closest to:

The forward rate is about Rs 86.2 per dollar. Under interest rate parity, spot 83 is multiplied by the ratio of rupee to dollar growth factors, 1.07 divided by 1.03. Rupee carries higher interest, so it trades at a forward discount against the dollar.

  1. A79.80
  2. B86.19Correct
  3. C86.32
  4. D83.00

Explanation

Forward = Spot x (1+iINR)/(1+iUSD) = 83 x 1.07/1.03 = 83 x 1.038835 = 86.22 approximately; precisely 88.81/1.03 = 86.2233. The nearest option is 86.19... Computation: 83x1.07=88.81; 88.81/1.03=86.22. Option 86.19 is closest; 86.32 results from adding the rate differential of 4% ignoring the denominator scaling (83x1.04=86.32). The 79.80 option inverts the ratio.

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