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**Question 88** Risk-free interest rates on a continuously compounded basis are 4% in the country of Effingham (EFG) and 6% in the country of Hijastan (HIJ). The spot exchange rate is 2.3875 EFG per unit of HIJ (i.e., HIJ/EFG 2.3875). The arbitrage-free 8-month forward exchange rate is closest to: | Financial Risk Manager Part 1 Quiz - LeetQuiz

Explanation:

The arbitrage-free forward exchange rate is calculated as
$F = S \times \left[(1 + r_{\text{YYY}})/(1 + r_{\text{XXX}})\right]^T$ .

With the exchange rate quoted per unit of HIJ, $r_{DC}$ is the EFG interest rate and $r_{FC}$ is the HIJ interest rate.

Therefore, $F = 2.3875 \times (1.04 / 1.06)^{(8/12)} = 2.3574$ .

(Book 3, Module 35.2, LO 35.i)

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Question 88

Risk-free interest rates on a continuously compounded basis are 4% in the country of Effingham (EFG) and 6% in the country of Hijastan (HIJ). The spot exchange rate is 2.3875 EFG per unit of HIJ (i.e., HIJ/EFG 2.3875). The arbitrage-free 8-month forward exchange rate is closest to:

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Financial Risk Manager Part 1

Get started today

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Get started today

Question 88 Risk-free interest rates on a continuously compounded basis are 4% in the country of Effingham (EFG) and 6% in the country of Hijastan (HIJ). The spot exchange rate is 2.3875 EFG per unit of HIJ (i.e., HIJ/EFG 2.3875). The arbitrage-free 8-month forward exchange rate is closest to:

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Question 88

Risk-free interest rates on a continuously compounded basis are 4% in the country of Effingham (EFG) and 6% in the country of Hijastan (HIJ). The spot exchange rate is 2.3875 EFG per unit of HIJ (i.e., HIJ/EFG 2.3875). The arbitrage-free 8-month forward exchange rate is closest to: