FX Calculation Question

CFA Level I
#1

Hi All,

So currently doing a question that is as follows:

The annual risk-free interest rate is 10% in the United States (USD) and 4% in Switzerland (CHF), and the 1-year forward rate is USD/CHF 0.80. Today’s USD/CHF spot rate is closest to: A. 0.7564 B: 0.8462 C: 0.8888

In working this out I am using the formula which is forward/spot = [(1+(i) price) / (1+(i) base)] and I am putting the US interest rate (10%) as the price, but the answer is putting it as the base? Any idea as to why?

In the fx rate, the base currency here is the Swiss Franc and not the USD?

Maybe mistepping something here but just wondering if somone may be able to shed some light.

#2

Everything you have said is correct.

You’re solving for the spot rate, not the forward rate. So,

spot/forward = (1 + ibase) / (1 + iprice)

spot = forward × (1 + ibase) / (1 + iprice)

#3

Great thank you!

#4

thanks!