Top 13 Forex and Interest Rate Questions You Need To Solve

Q.1) The current exchange rate between US dollar and Euro is $1.1/Euro. [As the amount expressed is in US $ (per €) here US $ is home currency and € is foreign currency]. Interest rate in the US and Euro region is 5% and 6% respectively. What is exchange rate expected after 6 months?

(Ans.: 1.09466. Hence, Euro depreciates. Dollar is at premium)

Q.2) Exchange Rates:

35.0020/$ (Spot)

35.9010/$ (6 months)

Interest Rates:

$ 7% per annum

12% per annum

Workout arbitrage possibilities.                                           (Mumbai University, October, 2002)

(Ans.: Rs. 1583 on investment of Rs. 1 million)

Q.3) Currency Units:

E.g. Currency $: 0.6650/DM (Spot)

Currency $: 0.6700/ DM (3-months)

Interest Rates:

DM: 7.00% per annum

Currency $: 9.00% per annum

Calculate arbitrage gain possible from the above data.          (Mumbai University, April, 2002)

(Ans.: Formula 1 – Positive Borrow Home. Invest foreign Gain 2,650 CAD an investment of 1 million CAD. Formula 2 – Negative Reject)

Q.4) Spot rate is /$ 39. Interest Rate in India is 8% per annum. Interest rate in US is 5% per annum. Calculate possible 6-months forward rate as per international Fischer Effect.

(Ans.: F = 39.5707 /$)

Q.5) The following table shows interest rates for $ and FFr. The spot exchange rate 7.05 FFr per dollar (All the percentage rates are annualized).

                  3 months

Dollar interest rate                  11.5%

France interest rate                  19.5%

Find 3 months forward rate.                                                 (Mumbai University, October 2003)   

(Ans.: Forward rate as per interest rate parity theory would be FFr 7.1871/$)

Q.6) Exchange Rates:

CHF 1.3829 per $ (Spot)

CHF 1.3849 per $ (3 months)

Interest Rates:

$ 4 per cent per annum

CHF 5 per cent per annum

Workout the arbitrage possibilities.

(Ans.: Formula I – Negative. Formula II- Positive, 1038 foreign currency/$1,038 Gain on million)

Q.7) Exchange Rates:

Can $: 0.665/DM (Spot)

Can $: 0.670/DM (3 months)

Interest Rates:

DM: 7.00% per annum

Can $: 9.00% per annum

Calculate the arbitrage gain possible from the above data.    (Mumbai University, April 2002)

(Ans.: Formula I – Positive, Can$ 2,650 on million. Formula II- Negative)

Q.8) From the following data calculate the possibilities of a gain/loss in arbitrage.

Spots rate FFR 6.00                                        = US $ 1

6 months forward rate FFR 6.0020                = $ 1

Annualized interest rate on 6 months US $    = 5%

Annualized interest rate 6 months Fr              = 8%.               (Mumbai University, May 2004)

(Ans.: Formula I – Negative. Formula II- Positive, 14,653)

FISHER EFFECT (CIP):

Q.9) SGD 2.0749/EUR spot in Euroland interest rate 2.24% p.a. for 6 months.

SGD 2.0622/EUR 6 month Forward.

Compute annual interest rate in Singapore for 6 months to ensure no arbitrage possibilities.

(Ans.: 1%)

Q.10) The spot rate in Canada for British Pound is CAD 2.2646/GBP. Forward rate for 3 months is CAD 2.2520/GBP. Interest rates in Canada are 2.64% per annum for 3 months. Find interest rates in Britain to avoid any arbitrage possibilities.

(Ans.: 4.89%)

Q.11) If spot rate in Japan for US$ is ¥ 111.04/$. Japan interest rates are 0.052% p.a. and US interest rates are 2.11% p.a. Find 9 month forward rate as per CIP.

(Ans.: ¥ 109.35/$)

Q.12) Spot rate for US Dollar is Rupee 50. Interest Rate in India is 11% per annum and in US of A it is 6% per annum. Calculate 3 month and 6 month forward rates.

(Ans.: 50.6158 and 51.2136)

Q.13) 1 GBP = USD 1.6400 Spot and 6 months forward rate is 1 GBP = USD 1.6480. Find interest rate in Britain if interest in US of A is 5%; as per international fischer effect.

(Ans.: 4%)