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The current spot rate for the US dollar /euro is $/€ 2.0000 +/- 0.003. The dollar is quoted at
a 0.2c premium for the forward rate.
What will a $2,000 receipt be translated to at the forward rate?
A €4,002
B €999.5
C €998
D €4,008I found the above question strangely difficult .The way two currencies are quoted above cannot be seen anywhere in the learning text.
Some explanation will he helpful.You really must watch my lectures – I do an almost identical exam in my lectures on foreign exchange risk management (and I cannot just type out all my lectures here!).
The spot rate is 2.000 – 0.0030 = 1.9970, to 2.000 + 0.0030 = 2.0030
i.e. 1.9970 – 2.0030Because the forward rate is quoted at a premium of 0.2 cents ( which is 0.0020 $’s)
You subtract 0.0020 from both of the spot rates to get the forward rates.
Hi John,
That mean we will adjust the spot rate first and then subtract the premium from the spot rate …so as it is a receipt it will be the higher rate I-e 2.0030-.0020 = 2.001
therefore 2000/2.001 =999.5 euros
is this right answer?
Thanks Sir! All clear .Actually the concepts were clear but the way the currency was quoted confused me.
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