A bank has been asked to provide a three-month forward EUR/USD ‘buy\' quote for
ID: 2615678 • Letter: A
Question
A bank has been asked to provide a three-month forward EUR/USD ‘buy' quote for a corporate client. The following information is available to the FX dealer at the bank:
Bid
Offer
Spot EUR/USD
1.0770
1.0782
3-month US interest rate
3.75% p.a.
3.85% p.a.
3-month euro interest rate
2.65% p.a.
2.75% p.a.
Calculate the bid and ask a three-month forward rate.
A.
EUR/USD 1.0796–1.0781
B.
EUR/USD 1.0797–1.0782
C.
EUR/USD 1.0738–1.0755
D.
EUR/USD 1.0743–1.0750
A bank has been asked to provide a three-month forward EUR/USD ‘buy' quote for a corporate client. The following information is available to the FX dealer at the bank:
Bid
Offer
Spot EUR/USD
1.0770
1.0782
3-month US interest rate
3.75% p.a.
3.85% p.a.
3-month euro interest rate
2.65% p.a.
2.75% p.a.
Calculate the bid and ask a three-month forward rate.
A.
EUR/USD 1.0796–1.0781
B.
EUR/USD 1.0797–1.0782
C.
EUR/USD 1.0738–1.0755
D.
EUR/USD 1.0743–1.0750
Bid
Offer
Spot EUR/USD
1.0770
1.0782
3-month US interest rate
3.75% p.a.
3.85% p.a.
3-month euro interest rate
2.65% p.a.
2.75% p.a.
Explanation / Answer
Spot rate,
1Euro=$1.0770-$1.0782
Calculating Forward rate for 3 month:-
Forward rate/Spot Rate=(1+(int.rate of $)*3/12))/(1+(int.rate of Euro)*3/12))
For buy rate:
FR/1.0770=(1+.0375*3/12)/(1+.0265*3/12)
FR=1.0799
For Sell/Offer rate:
FR/1.0782=(1+.0385*3/12)/(1+.0275*3/12)
FR=1.08114
Therefore, Forward rate of 3 months for 1Euro = $1.0799 - $1.08114
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