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CFA Level I · CFA Level I Exam · Exchange Rate Calculations

The spot rate is JPY/USD 150.00 and the 6-month forward rate is 147.00. Based only on this information, which statement is most accurate?

The forward is below spot, so the forward points are negative and the US dollar, as the base currency, trades at a forward discount. Under covered interest parity, this indicates the dollar has the higher interest rate than the yen, not the lower one.

  1. AThe forward points are +300 and the US dollar trades at a forward premium.
  2. BThe forward points are -300 and the US dollar trades at a forward discount.Correct
  3. CThe forward points are -300 and the Japanese yen has the higher interest rate.

Explanation

Forward minus spot is 147.00 - 150.00 = -3.00. Scaled by 10,000 that is -30,000 for four-decimal quotes, but the sign is what matters here: it is negative. The USD is the base currency and the forward is below spot, so it is at a discount. Under covered interest parity, the base currency (USD) then has the higher interest rate, so the yen option is wrong.

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