CMA Final · Strategic Financial Management · Foreign Exchange Risk Management
The spot rate is ₹85.00/USD. The 1-year INR interest rate is 8.16% and the 1-year USD interest rate is 4.00%. Under interest rate parity, what is the 1-year forward rate?
The one-year forward rate is ₹88.40 per USD. Interest rate parity multiplies spot by the ratio of rupee to dollar growth factors, so 85 × 1.0816 ÷ 1.04 equals 88.40. Using the simple rate difference, or inverting the ratio, gives the wrong figures.
- A₹88.40Correct
- B₹88.54
- C₹81.73
- D₹91.94
Explanation
Forward = Spot × (1 + i_INR)/(1 + i_USD) = 85 × 1.0816/1.04 = 85 × 1.04 = ₹88.40. ₹88.54 uses the rate difference of 4.16% instead of the ratio. ₹81.73 inverts the ratio.
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