Question

# The foreign exchange department at Tokyo’s Daiwa Bank quoted the spot rate on the euro at...

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 €___________/¥

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 / ¥