- CFA Exams
- CFA Level I Exam
- Study Session 14. Derivatives
- Reading 37. Pricing and Valuation of Forward Commitments
- Subject 6. Currency Forward and Futures Contracts

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**CFA Practice Question**

Suppose the domestic currency is the US$ and the foreign currency is the British pound.

- The spot exchange rate is $1.4718.
- The U.S. interest rate is 4.5%.
- The British interest rate is 2.25%.
- Assume these interest rates are fixed and don't change over the life of the forward contract. They are based on annual compounding and are not quoted as LIBOR-type rates.
- Assume a currency forward contract has a maturity of 120 days.

With discrete compounding, what should be the forward price if you want to enter into a forward contract to long British pounds in 120 days?

A. 1.4824

B. 1.4792

C. 1.4932

**Explanation:**F(0, T) = F(0, 120/365) = [1.4718/(1.0225)

^{120/365}] (1.045)

^{120/365}= 1.4824

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