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Unformatted text preview: e forward
exchange rate to the spot exchange rate.
• Assume an Aussie investor has a choice of investing
“X” $A for 1 year, in either:
• An Australian government bond @ i$ p.a., OR
• A foreign government bond @ i£ p.a. Assume exchange rate is “s” £ per $A.
30 The Interest Parity Forward Rate 1 + i * f = s 1+ i Where i* is interest rate for term ccy and i is interest rate for
base ccy. And S is spot rate of base/term.
31 Forward Market Quotations
• Forward points and forward exchange rates
– Example 6: A company approaches a FX dealer for a
forward quote on the USD/CHF with a 3-month (90-day)
delivery. The spot rate is USD/CHF1.1560. The dealer
needs to calculate the forward points. Assume the 3month eurodollar interest rate is 3.00% per annum and
the 3-month euroSwiss franc interest rate is 4.00% per
annum f = 1.1560 [ 1 + (0.04 x 90/365) ]
1 + (0.03 x 90/365)
f = 1.1589
(Here USD/CHF = Base/Term, thus i* is interest for CHF while i is interest rate for
USD) 32 Unbiased Forward Rates
• ... states that the for...
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- Fall '13