Learning Module: Exchange Rate Calculations

Disclaimer: Following are the questions provided by CFA Institute to its registered
candidates for practice purpose.

The following information relates to questions 1-2

A dealer provides spot rate quotes for the following currencies:

1. The spot ZAR/HKD cross-rate is closest to:

A. 0.9205.
B. 1.0864.
C. 1.2978.

2. Another dealer is quoting the ZAR/SEK cross-rate at 1.1210. The arbitrage profit
that can be earned is closest to:
A. ZAR3671 per million Swedish krona traded.
B. SEK4200 per million South African rand traded.
C. ZAR4200 per million Swedish krona traded.

3. A BRL/MXN spot rate is listed by a dealer at 0.1378. The six-month forward rate is
0.14193. The six-month forward points are closest to:
A. –41.3.
B. +41.3.
C. +299.7.

4. A three-month forward exchange rate in CAD/USD is listed by a dealer at 1.0123.

The dealer also quotes three-month forward points as a percentage at 6.8 percent.
The CAD/USD spot rate is closest to:
A. 0.9478.
B. 1.0550.
C. 1.0862.

5. If the base currency in a forward exchange rate quote is trading at a forward

discount, which of the following statements is most accurate?
A. The forward points will be positive.
B. The forward percentage will be negative.
C. The base currency is expected to appreciate versus the price currency.

6. A forward premium indicates:

A. an expected increase in demand for the base currency.
B. the interest rate is higher in the base currency than in the price currency.
C. the interest rate is higher in the price currency than in the base currency.
 Exchange Rate Calculations

7. The JPY/AUD spot exchange rate is 82.42, the Japanese yen interest rate is 0.15
percent, and the Australian dollar interest rate is 4.95 percent. If the interest rates
are quoted on the basis of a 360-day year, the 90-day forward points in JPY/AUD
would be closest to:
A. –377.0.
B. –97.7.
C. 98.9.

8. A firm in a market environment characterized by monopolistic competition is most

likely to:
A. continue to experience economic profit in the long run.
B. have a well-defined supply function reflecting its marginal and average costs.
C. have many competitors each following its own product differentiation strategy.

9. The following information is available:

• New Zealand dollar (NZD) to British pound (GBP) spot exchange rate: 2.0979
• Libor interest rates for the British pound: 1.6025%
• Libor interest rates for the New Zealand dollar: 3.2875%
• All Libor interest rates are quoted on a 360-day year basis
The 180-day forward points (scaled up by four decimal places) in NZD/GBP is closest
to:
A. 39.
B. 176.
C. 348.

10. Which of the following statements is most accurate based on the FX quotations in
the table?

A. The forward rate is trading at a discount to the spot rate by 0.0049 points.
B. The euro is trading at a forward premium of 49 points.
C. The US dollar is trading at a forward premium of 49 points.

11. If the domestic currency is trading at a forward premium, then relative to the
interest rate of the domestic country, the interest rate in the foreign country is
most likely:
A. lower.
B. higher.
C. the same.

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12. An investor examines the following rate quotes for the Brazilian real (BRL) and the
Australian dollar (AUD) and shorts BRL500,000.
• Spot rate BRL/AUD: 2.1128
• BRL 1-year interest rate: 4.1%
• Forward rate BRL/AUD: 2.1388
• AUD 1-year interest rate: 3.1%
The risk-free arbitrage profit that is available is closest to:
A. –BRL6,327.
B. BRL1,344.
C. BRL6,405.

13. A New Zealand traveler returned from Singapore with SGD7,500 (Singapore dollars).
A foreign exchange dealer provided the traveler with the following quotes:

The amount of New Zealand dollars (NZD) that the traveler would receive for his
Singapore dollars is closest to:
A. NZD7,248.
B. NZD4,565.
C. NZD7,761.

14. A research report produced by a dealer includes the following exchange rates:

The expected appreciation (%) of the Canadian dollar (CAD) relative to the British
pound (GBP) is closest to:
A. –3.00
B. 3.09.
C. 0.70.

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 Exchange Rate Calculations

15. A dealer report includes the following exchange rate details:

The expected CAD/CHF cross rate in one year is closest to:

A. 1.04.
B. 0.98.
C. 1.02.

16. Assume the following:

USD: US dollar; EUR: Euro; AUD: Australian dollar

The USD/AUD spot rate is closest to:

A. 1.0296.
B. 1.0425.
C. 1.1154.

17. A currency trader observes the following rates:

A riskless arbitrage profit exists that is closest to:

A. 0.54%.
B. 2.04%.
C. 2.46%.

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Solutions
1. A is correct. To get to the ZAR/HKD cross-rate, it is necessary to take the inverse
of the CNY/ZAR spot rate and then multiply by the CNY/HKD exchange rate:
ZAR/HKD = (CNY/ZAR) −1 × ( CNY/HKD)
= (1 / 0.9149) × 0.8422 = 0.9205

2. C is correct. The ZAR/SEK cross-rate from the original dealer is (1.0218/0.9149) =

1.1168, which is lower than the quote from the second dealer. To earn an arbitrage
profit, a currency trader would buy Swedish krona (sell South African rand) from the
original dealer and sell Swedish krona (buy South African rand) to the second dealer.
On SEK1 million, the profit would be: SEK1,000,000 × (1.1210 – 1.1168) = ZAR4,200

3. B is correct. The number of forward points equals the forward rate minus the spot
rate, or 0.14193 – 0.1378 = 0.00413, multiplied by 10,000: 10,000 × 0.00413= 41.3
points. By convention, forward points are scaled so that ±1 forward point corresponds
to a change of ±1 in the last decimal place of the spot exchange rate.

4. A is correct. Given the forward rate and forward points as a percentage, the unknown
in the calculation is the spot rate. The calculation is as follows:
Spot rate × (1 + Forward points as a percentage) = Forward rate
Spot rate × (1 + 0.068) = 1.0123
Spot = 1.0123/1.068 = 0.9478

5. B is correct. The base currency trading at a forward discount means that 1 unit of
the base currency costs less for forward delivery than for spot delivery (i.e., the
forward exchange rate is less than the spot exchange rate). The forward points,
expressed either as an absolute number of points or as a percentage, are negative.

6. C is correct. To eliminate arbitrage opportunities, the spot exchange rate (S), the
forward exchange rate (F), the interest rate in the base currency (rd, and the
interest rate in the price currency (rf) must satisfy:
Ff/d/ Sf/d = (1+rfτ / 1+rdτ).
According to this formula, the base currency will trade at forward premium (F > S)
if, and only if, the interest rate in the price currency is higher than the interest rate
in the base currency (rf > rd).

7. B is correct. The forward exchange rate is given by:

The forward points are as follows:

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100 × (F × S) = 100 × (81.443 – 82.42) = 100 × (–0.977) = –97.7.

Because the spot exchange rate is quoted with two decimal places, the forward points
are scaled by 100.

8. C is correct. As the name implies, monopolistic competition is a hybrid market

structure. The most distinctive factor in monopolistic competition is product
differentiation. Although the market is made up of many firms that compose the
product group, each producer attempts to distinguish its product from that of the
others, and product differentiation is accomplished in a variety of ways.

9. B is correct. Covered interest arbitrage will ensure identical terminal values by

investing the same initial amounts at the respective country’s domestic interest
rates:

GBP investment: ₤1 × (1 + 0.016025 × 180/360) = ₤1.008013

NZD investment: NZ$2.0979 × (1 + 0.032875 × 180/360) = NZ$2.13238

The forward rate is determined by equating these two terminal amounts:

NZD/GBP forward rate = NZ$2.13238/₤1.008013 = 2.115429

Forward points = (Forward – Spot) × 10,000

= (2.1155– 2.0979) × 10,000

= 175.3 =176 (rounded)

10. B is correct. Forward premium = Forward rate – Spot rate = 1.3001 – 1.2952 = 0.0049.
To convert to points, scale four decimal places—that is, multiply by 10,000 = 10,000
× 0.0049 = 49 points. Because the forward rate exceeds the spot rate for the base
currency (euro), the euro is trading at a forward premium of 49 points.

11. B is correct. The currency with the higher (lower) interest rate will always trade at
a discount (premium) in the forward market. The lower interest rate in the domestic
country will be offset by the appreciation of the domestic country’s currency over
the investment horizon.

12. B is correct. The equation below is often called the “covered interest arbitrage
relationship” because if it is not satisfied, a risk-free arbitrage opportunity exists.
It is based on the required equivalence of the two possible investment paths: if the
two paths do not produce the same terminal result, an arbitrage profit exists.

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13. A is correct. The NZD/SGD cross-rate is NZD/USD × USD/SGD = 0.7670 × 1.2600

= 0.9664. The traveler will receive: NZD0.9664 per SGD; NZD0.9664 × SGD7,500 =
NZD7,248.

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14. B is correct.

15. C is correct.

16. B is correct.

Step 1: Find the spot rate for the EUR/AUD

Spot = Forward Rate – Forward Points

= 1.4300 – (400/10,000)

= 1.3900

Step 2: Calculate current cross rate

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 Exchange Rate Calculations

(USD/AUD) = (EUR/AUD) × (USD/EUR)

= 1.3900 × 0.7500

= 1.0425

17. A is correct. The trader would be able to earn a riskless arbitrage profit of 0.54%,
calculated as follows:

Return on the hedged foreign investment: Sf/d(1 + if)[1/Ff/d] =

1.7550(1.045)[1/1.7900] = 1.0246 = 2.46%.

Riskless arbitrage profit = Domestic risk-free rate – Return on the hedged foreign
investment: 3.00% – 2.46% = 0.54%.

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