CA Final · Advanced Financial Management · Risk Management
Spot USD/INR is 83.00. Three-month interest rates are 8% p.a. in India and 4% p.a. in the USA (simple, quarterly pro-rata). Using interest rate parity, the three-month forward rate is closest to:
The three-month forward rate is about 83.83. Under interest rate parity, spot 83.00 is multiplied by 1.02 for Indian interest and divided by 1.01 for US interest. The higher Indian rate means the dollar trades at a forward premium against the rupee.
- A83.80
- B83.83Correct
- C82.20
- D83.00
Explanation
Forward = 83.00 × (1 + 0.08×3/12)/(1 + 0.04×3/12) = 83.00 × 1.02/1.01 = 83.8317, about 83.83. Option 83.80 wrongly uses the rate differential of 4% x 3/12 = 1% on spot, i.e. 83.83 rounded loosely; 82.20 subtracts the premium, wrongly treating INR as the lower-interest currency.
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