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Forward exchange rate

Forums › Ask ACCA Tutor Forums › Ask the Tutor ACCA FM Exams › Forward exchange rate

  • This topic has 5 replies, 3 voices, and was last updated 8 years ago by John Moffat.
Viewing 6 posts - 1 through 6 (of 6 total)
  • Author
    Posts
  • May 15, 2017 at 11:09 pm #386370
    myacca1990
    Participant
    • Topics: 153
    • Replies: 164
    • ☆☆☆

    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 €4,008

    I 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.

    May 16, 2017 at 12:51 pm #386450
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54668
    • ☆☆☆☆☆

    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 – 2.0030

    Because 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.

    May 16, 2017 at 1:58 pm #386483
    Noureen
    Participant
    • Topics: 14
    • Replies: 16
    • ☆

    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?

    May 16, 2017 at 8:16 pm #386529
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54668
    • ☆☆☆☆☆

    Yes – that is correct 🙂

    May 17, 2017 at 12:27 am #386563
    myacca1990
    Participant
    • Topics: 153
    • Replies: 164
    • ☆☆☆

    Thanks Sir! All clear .Actually the concepts were clear but the way the currency was quoted confused me.

    May 17, 2017 at 8:10 am #386593
    John Moffat
    Keymaster
    • Topics: 57
    • Replies: 54668
    • ☆☆☆☆☆

    You are welcome 🙂

  • Author
    Posts
Viewing 6 posts - 1 through 6 (of 6 total)
  • The topic ‘Forward exchange rate’ is closed to new replies.

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