Question

1)The ¥/£ spot exchange rate is ¥80/£ and the one year forward price is £.006/¥ . Find the forward premium (discount) from the British point of view. Round intermediate steps and your final answer to four decimals. Enter your answer in decimal format. ?

2)One year interest rates in Brazil and Spain are 6% and 2%, respectively, and the spot value for the real (R$) is €.25/R$. What should be the one year forward rate according to IRP? (Assume the Brazil is the home country and round intermediate steps to four decimals.)

a) R$3.8491/€

b) €.2598/R$

c) R$4.1568/€

d) R$3.8491/€

Answer 1

1) Spot Exchange rate from British Point of View = 1/80 = 0.0125
One Year forward price = 0.006
The Forward Discount = (Forward Price - Spot Price)/Spot Price = (0.006-0.0125)/0.006 = -1.0833

2) One Year forward rate according to IRP = Spot Rate *(1+Variable Currency interest Rate)/(1+ Fixed Currency Interest Rate)
= 0.25*(1+2%)/(1+6%) = 0.240566
One Year forward rate assuming Brazil as home currency = 1/0.240566 = 4.1568

Option c is correct option.

Since NPV is positive Project is acceptable.

Please Discuss in case of Doubt

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