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CMA Final · Strategic Financial Management · Foreign Exchange Risk Management

Spot USD/INR is Rs 82.00. The 6-month interest rates are 8% p.a. in India and 4% p.a. in the USA. Using simple interest-rate parity for a 6-month period (rates halved), what is the theoretical 6-month forward rate?

Under interest-rate parity the forward rate equals spot times the ratio of rupee to dollar growth factors for the period. With 4% and 2% for six months, 82 x 1.04/1.02 gives about Rs 83.61 per dollar.

  1. ARs 83.58Correct
  2. BRs 80.42
  3. CRs 83.64
  4. DRs 82.82

Explanation

Forward = 82 x (1 + 0.04)/(1 + 0.02) = 82 x 1.04/1.02 = Rs 83.608, about Rs 83.61? Check: 1.04/1.02 = 1.019608; x 82 = 83.6078. So the nearest listed value is 83.64 only if rounded differently; the correct computed value is Rs 83.61.

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