Question #32
Reading: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value
PDF File: Reading 5 Currency Exchange Rates - Understanding Equilibrium Value.pdf
Page: 13
Status: Unattempted
Question
An investor has entered into a 90-day forward contract to purchase 2 million GBP at an all-in rate of USD 1.4612. In 30 days, the following quotes were available: USD/GBP spot rate 1.4522−24 30-day forward rate 1.4618−21 60-day forward rate 1.4621−25 90-day forward rate 1.4632−36 Interest rate information: Interest rates When contract was initiated Currently (t=30) USD GBP USD GBP 30-day 0.20% 0.32% 0.20% 0.32% 60-day 0.21% 0.32% 0.21% 0.32% 90-day 0.21% 0.33% 0.21% 0.33% The mark-to-market value of the forward contract is closest to:
Answer Choices:
A. USD 1999
B. USD 1800
C. USD 2599
Explanation
To unwind the forward contract, the investor would enter into a 60-day forward contract
to sell GBP. The relevant exchange rate is 1.4621. The value obtained will be in price
currency (USD) and would be discounted at USD interest rate for 60 days (at t=30).
(Module 5.2, LOS 5.d)
Vt =
=
= 1799
(FPt−FP)(contract size)
[1+R(
)]
days
360
(1.4621−1.4612)(2,000,000)
[1+0.0021(
)]
60
360