I choose B) as the answer and I used the formula, F/S = (1+rf)/(1+rd), with F and S in DC/FC, so that S=9.6246 CY/Euro, so Euro was the foreign rate. Why isn’t this correct? Chao Wong, CFA, is the portfolio manager for the China Current Fund in Switzerland. The current spot exchange rate is 9.6246 Chinese yuan per euro. Wong believes that there is an opportunity to speculate on the Chinese yuan. Wong wants to check the one-year forward rate. Assuming the one-year risk-free rate for the European Economic Community is 11.76 percent and the Chinese one-year risk-free interest rate is 10.2 percent, what should the one-year forward rate be for the Chinese yuan? A) 9.4903 CY/EUR. B) 9.7608 CY/EUR. C) 9.6246 CY/EUR. D) 9.4884 CY/EUR. Your answer: B was incorrect. The correct answer was A) 9.4903 CY/EUR. The formula for covered interest rate parity is: Exact methodology: F / S0 = (1 + rFC) / (1 + rDC) Solving for F we get: F = S0(1 + rFC) / (1 + rDC) F = 9.6246 (1 + 0.102)/(1 + 0.1176) F = 9.6246 (1.102)/(1.1176) F = 9.4903 CY/EUR
Forget the FC/DC stuff. For forwards (and numerous other parity relationships) just mimic the way the currencies are quoted. CY/E and do the same for the interest rates.
Just match the denomiators and numerators like Nib said. If the rates are FC/DC, then do the exchange rate FC/DC. So given CY/EUR exchange rates, put your formula for the rates in 1+Cy/1+EUR
9.6246 CY / 1 Euro 9.6246 CY grows to (9.6246*1.102) = 10.606309 CY 1 Euro grows to (1*1.1176) = 1.1176 New exchange rate should be 10.606309 CY / 1.1176 Euro or (10.606309/1.1176) = 9.4902 CY / 1 Euro