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Author | Topic: Forward exchange rate Question |
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Gavin1987@2014-05-21 14:10:54 |
The question is: Consider two currencies, the WSC and BDR. The spot WSC/BDR exchange rate is 2.875, the 180-day riskless WSC rate is 1.5% and the 180-day riskless BDR rate is 3.0%. The 180-day forward exchange rate that will prevent arbritage profits is closest to: 1. 2.833 WSC/BDR 2. 2.854 WSC/BDR 3. 2.918 WSC/BDR The answer is B. They took the riskless rates and divided it by 2. I don't understand why they did that? |

jkls@2014-05-27 21:25:22 |
does anyone know the answer to this question? |

davcer@2014-05-28 16:12:56 |
Spot=(1+rd)*Fwd/(1+rf) where rd=domestic rate rf=foreign rate Since rates are in annual terms you have to get the effective rates for the period you need, in this case 180 days which is the same to 180/360=0.5 So, the effective rates are .75% and 1.5% you get (1.0075)*2.875/1.015=2.854 Hope that helps |

### CFA Discussion Topic: Forward exchange rate Question

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