Calculating the Arbitrage Free Forward Exchange Rate

CFA Level I
#1

Hi Everyone,

I am having difficulty with the follwoing questions:

The spot rate for Chinese yuan per Canadian dollar is 6.4440. If the Canadian interest rate is 2.50% and the Chinese interest rate is 3.00%, the 3-month no-arbitrage forward rate is closest to:

A) 6.452 CNY/CAD. B) 6.475 CNY/CAD. C) 6.436 CNY/CAD.

A is the answer although in my calculations I am always getting B) 6.4440 x (1.03/1.025)

The spot rate for Japanese yen per UK pound is 138.78. If the UK interest rate is 1.75% and the Japanese interest rate is 1.25%, the 6-month no-arbitrage forward rate is closest to:

A) 138.44 JPY/GBP. B) 138.10 JPY/GBP. C) 138.95 JPY/GBP.

Answer is A but I am getting C with my calculations.

Any help is appreciated.

Thanks!

#2

You are using annual interest rates in your calculations. Use the effective 3-month and 6-month rates respectively.

#3

Yes I see what I did now.

Thank you very much!

#4

Hi always use the formula while calculating, Forward/spot = ( 1 + Interest rate domestic ) / ( 1+ Interest rate Foregin).

Just put it = 138.78 ( 1 + .0175 ) / ( 1+ .0125 )

Here the answer you will get after this138.44(A).