### CFA Practice Question

There are 227 practice questions for this study session.

### CFA Practice Question

Suppose the domestic currency is the U.S. dollar and the foreign currency is the Canadian dollar.

• The spot exchange rate is \$0.7321.
• The U.S. interest rate is 3.5%.
• The Canadian interest rate is 4.25%.
• 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 90 days.

What should be the forward price if you want to enter into a forward contract to long Canadian dollars in 90 days? What if interest is continuously compounded?

With discrete compounding:
F(0, T) = F(0, 90/365) = [0.7321/(1.0425)90/365] (1.035)90/365 = 0.7308

With continuously compounding:
r = ln(1.035) = 3.44%, and r(f) = ln(1.0425) = 4.16%
F(0, T) = (0.7321 e -0.0416 (90/365)) e 0.0344 (90/365) = 0.7308

Note that the two rates are equal.