CFA Practice Question

There are 253 practice questions for this study session.

CFA Practice Question

Three months ago a dealer sold EUR 1 million forward against USD for a 180-day term at an all-in rate of 1.2765 (USD/EUR). The following is the current spot rate and forward points being quoted for the USD/EUR pair:

Spot rate (USD/EUR): 1.2770/1.2780
Three month: 12/15
Six month: 16/20
The annualized three-month LIBOR is 4%.

What is the mark-to-market value of the deal now?
A. 3,000 EUR.
B. 2,970 USD.
C. 1,485 USD.
Explanation: The dealer would need to buy 3-month forward EUR 1 million at 1.2780 + 0.0015 = 1.2795. The difference of 3,000USD [(1.2795 - 1.2765) x 1 million] should be discounted using 1% (4% / 4): 3000/1.01 = 2,970USD.

User Contributed Comments 8

User Comment
leftcoast He must be losing money because the Euro has gone up in value against the USD and he sold it forward at a lower exchange rate.
NeilRP123 I don't understand how the forward points are calculated @ 0.0015? I understand the rest of the problem, can someone help out?
NeilRP123 ooo it's 12 points for bid, 15 ask (divided by 10,000)
AlbertVall If you buy a forward, you must take the ask price. In this case, the term dealer no matters, so you have to take the ask spot price plus the pips: 1,2780 + 0,0015 = 1,2795.
olympria It is a 'Dealer' and he is BUYING the EUR right? So, wouldn't you take the 'bid price'? Why do they take 'ask price'?
myron @olympria: it does not matter it's called a dealer or not. A party needs to buy 3-month forward EUR 1 million and the party has to pay the ask price, no matter the party is a dealer or not.
daverco I think it does matter. The dealer commits to selling EUR 1M (= "sell forward"), which he'll sell for the highest price in USD, the ask rate.
dimitris13 The euro appreciates so he loses 2970
You need to log in first to add your comment.