Not able to understand the explanation. I used the following formula F/S = (1+rd)/(1+rf). But I did not get exact result and selected close one. Could you please explain what is wrong to use above formula ---------------------------- An investor can invest in Tunisian dinar at r = 6.25 percent or in Swiss francs at r = 5.15 percent. She is a resident of Tunisia and the current spot rate is 0.8105 TND/SF. What is the approximate one-year forward rate expressed in TND/SF? A) 0.8016. B) 0.8194. C) 0.8215. D) 0.7995. Your answer: B was correct! The approximate forward premium/discount is given by the interest rate differential. This differential is: 6.25% - 5.15% = 1.10%. Since Tunisia has higher interest rates, its currency will be at a discount in the forward market. This discount equals: 0.011 x 0.8105 = 0.0089. Since the exchange rate is quoted in TND/SF, as a depreciating currency, it will take more TND to buy one SF. The forward rate is thus: 0.8105 + 0.0089 = 0.8194 TND/SF. In other words, the SF is stronger in the forward market.
I came across similar problem but they used the equation that I have mentioned in the earlier thread. I don’t have a clue the difference in these two questions. A resident of China can invest in Chinese yuan at 5.5 percent or in Egyptian pounds at 6 percent. The current spot rate is 80 CY/EGP. What is the one-year forward rate expressed in CY/EGP? A) 79.6226. B) 88.9876. C) 89.8976. D) 80.3792. Your answer: A was correct! Forward (DC/FC) = Spot (DC/FC)[(1 + rdomestic)/(1 + rforeign)] = (80 CY/EGP)[(1 + 0.055)/(1 + 0.06)] = (80)(0.99528) = 79.6226
F=S * (1 + Rtnd) / (1 + Rsf) = 0.8105 * 1.0625/1.0515 =0.81898 B is the closest answer. This equation is correct to get the exact answer. The explanation provided is just an approximation method interest differential <=> forward differential (rD - rF) <=> (F-S)/S