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23 February, 12:08

The current U. S. dollar / Chinese yuan currency spot rate is $0.130 per yuan. The fair value price for the U. S. dollar / Chinese yuan exchange rate for a 2-year forward contract is $0.1408. If the U. S. dollar denominated annual interest rate is 6.0%, the Chinese yuan-denominated annual interest rate must be 3%.

a) true

b) false

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Answers (1)
  1. 23 February, 12:42
    0
    b) false

    Explanation:

    US annual interest rate 6% = (1 + 6%) ² = 1.1236

    Chinese annual interest rate 3% = (1 + 3%) ² = 1.0609

    (1.1236 / 1.0609) x $0.130 per yuan = 1.0591 x $0.130 per yuan = $0.1377 per yuan

    The spot rate is the current exchange rate, while the forward rate is the expected future exchange rate.
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