Forward Rate Premium/Discount - Econ

CFA Level II
#1

I saw the following question:

For the pair of INR/USD, the mid-market spot rate is 60.06 INR/USD. The interest rates for the 180-day period are 3.2% and 6.8% respectively in U.S.A. and India. The forward market is trading at a correct price according to the interest rate parity equation.

What is the forward premium (discount) for an 180-day forward contract for INR/USD pair?

A) +1.0455

B) +1.0641

C) -0.9440

I am confused why we cant use the parity formula to get the forward price and then take the difference?

So: 60.06 x (1.068/1.032)^180/360 = 61.09857

Premium = 61.09857 - 60.06 = 1.0385

Any help? Thanks

#2

(1.068/1.032)^180/360 < incorrect

is not equal to

[1.068^(180/360)]/[1.032^(180/360)] < incorrect

[1.068x(180/360)]/[1.032x(180/360)] < correct

Reason: Mathematics.

#3

With all due respect, it is correct. Whack out your calculator and check.

Reason: Mathematics.

Can anyone advise on why the answer using the formula doesnt work?

#4

60,06*(1+0.068*(180/360))/(1+0.032*(180/360))= 61.124

61.124-60.06= 1.064

it’s not exp(180/360) but multiplied (covered interest parity).

#5

That’s it Taytus! Rookie error. I was doing 1.068 ^ 180/360

It should be 0.068 x 180/360 = Ans (+1)

#6

you were calculating the price of a currency forward contract.