EOC Futures Mkts
“The Following…to Q’s 9-14”
Uda…is CFO at Axia…HQ in Germany, reports in EUR.
UK Rate = 4.17%*
EUR Rate = 3.28%*
Spot Exchange Rate (GBP per EUR) = .6892
*244-day int. rates, discrete and annualized
Based on Ex. 2, the arbitrage-free 244-day forward exchange rate (GBP per EUR) is closest to:
The answer is A and gives F=S*[(1+RFdomestic)^T/(1+RFforeign)^T]. They put .6892[1.0417^(244/365)/1.0328^(244/365). That makes no sense bc 4.17% is the foreign rate and 3.28% is domestic as they say GBP per EUR, they’re based in EUR, report in EUR…
To quote Walter in The Big Lebowski, “Has the whole world gone CRAZY?”
I saw this same Q on Analyst Forum but they didn’t do a good job of explaining it.
Don’t get distracted by domestic or foreign as it doesn’t really matter in this case.
1. Look at the answer, what rate is it presented in? GBP/EUR which is the same numerator/denominator as the question (e.g. GBP per EUR = .6892 )
2. Now convert both the exchange rate to a 244 days forward:
1.0417 ^ (244/365) = 1.027687
1.0328 ^ (244/365) = 1.021809
In the same order as the rate give GBP / EUR = 1.027687 / 1.021809 = 1.005752
3. Now multiply the spot rate with the answer in 2 (1.005752), which will give you 0.693165
Unless the answer is asking for EUR / GBP you can easily get that with the [1/x ] button on your BA II calculator.
It’s up to you which ever method that works for you, personally I don’t really use the fixed f/d method as long as your answers are in the same order (numerator and denominator) before multiply the answers in #1 and #2 you will be fine.
The only exception is when there’s bid and ask, you can’t just switch it around with 1/x. For example when you switch from buy EUR to sell EUR, you would have to use the relevant rate and not just with the 1/x.
Even tho the #’s are right, the book’s formula still makes no sense.
I hear what you’re saying. Better to think abt it as Price/Base. If you’re in Australia and you’re dealing GBP for EUR’s, who gives a rat’s behind what country everyone’s in.
With all that bid-ask inverse stuff, my econ is glaringly lacking.
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