Forward Exchange Rate

CFA Level I Economics
#1

Consider two currencies, the WSC and the BDR. The spot WSC/BDR exchange rate is 2.875, the 180-day riskless WSC rate is 1.5% and the 180-day riskless BDR rate is 3.0%. The 180-day forward exchange rate that will prevent arbitrage profit is closest to:

A. 2.833

B. 2.854 (Correct)

C. 2.918

The answer is B, and on the explanation both 180-day rates are divided by two. could someone explain me why it is divided by two? Makes no sense for me, since the question asks the rate on a 180-day basis. Thanks!

2.875 * (1+1.5%/2) ------------- (1+ 3%/2)

#2

the 180 day rates are stated annual rates. If they were holding period rates, you wouldn’t need to divide by two.

The question doesn’t make this clear in my opinion but I think we are expected to assume it is a stated annual rate unless expressly stated otherwise.

#3

Interest rates are always – _ always! _ – quoted as annual rates.

#4

2.8964

It was divided by 2 because 180/360 = 0.5 (which is half of the annual rate)

#5

Thanks!!

#6

You’re welcome.