Calculating the Arbitrage Free Forward Exchange Rate

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mbjones21

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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)
2)
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!
 
You are using annual interest rates in your calculations. Use the effective 3-month and 6-month rates respectively.
 
mbjones21 wrote:
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)
2)
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!
Click to expand...
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).
 
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