Lect09-International Financial Markets-VineyChptr15

And s is spot rate of baseterm 31 forward market

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Unformatted text preview: e forward ratio 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 (cont.) – 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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