Question

The foreign exchange department at Tokyo’s Daiwa Bank quoted the spot rate on the euro at €0.007165/¥. The 90-day forward rate is quoted at a premium of 5.30 percent on the euro. What is the 90-day forward rate? (Round answer to 6 decimal places, e.g. 15.251945. Use 360 days for calculation.) Forward rate €___________/¥

Answer 1

Solution:

The formula for calculating the annualized forward premium / discount is

= [ ( Forward rate – Spot rate ) / Spot rate ] * ( 360 / No. of days of forward ) * 100

As per the information given in the question we have

Spot rate 1 ¥ = € 0.007165

Premium on the euro = 5.30 % = 0.0530

No. of days of forward = 90 days

Applying the above values in the formula we have:

0.0530 = [ ( Forward rate – 0.007165 ) / 0.007165 ] * ( 360 / 90 )

0.0530 * ( 90 / 360 ) * 0.007165 = Forward rate – 0.007165

Forward rate – 0.007165 = 0.0530 * ( 90 / 360 ) * 0.007165

Forward rate – 0.007165 = 0.00009494

Forward rate = 0.007165 + 0.00009494 = 0.00725994

= 0.007260 ( when rounded off to six decimal places )

Thus the forward rate = € 0.007260 / ¥