Book 1_Econ_EXCHANGE RATE CALCULATIONS

Question 1

A cross rate

Answer 1

the exchange rate between two currencies implied by their exchange rates with a common third currency

Question 2

forward rate calculation

Answer 2

Fw/spot = spot x (1+iprice)/(1+ibase)

Question 3

forward quote +25.3

Answer 3

• Percentage of percentage
• Forward = 1.4000+0.0025 = 1.4025

Question 4

forward quote +1.7%

Answer 4

• Forward = 1.4000 x (1+1.7%)

Question 5

Calculating a 30-, 90-, or 180-day forward exchange rate

Answer 5

Use interest rates for 30-, 90-, and 180-day periods rather than annual rates

Question 6

90-day riskless ABE rate is 5%

Answer 6

5% annually => 90-day interest = 5% x 90/360

Question 7

arbitrage opportunity

Answer 7

If a forward exchange rate does not correctly reflect the difference between the interest rates for two currencies:
- borrowing one currency,
- converting it to the other currency at the spot rate,
- investing the proceeds for the period,
- and converting the end-of-period amount back to the borrowed currency at the forward rate will produce more than enough to pay off the initial loan

Question 8

a forward premium or discount for a base currency

Answer 8

= forward/spot - 1
- Positive: Premium
- Negative: Discount

Question 9

Annual premium or discount

Answer 9

= 360/90 x The (90-day) forward premium or discount