International Fischer Effect Sums

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(1)   USD EUR             0.7000             Spot

Interest Rates        Europe             6%

US of A          5%

Calculate 6 month Forward Rate.

(Ans.: USD           EUR          0.7034)

 

(2)   CHF CAD                        0.8500             Spot

Interest rates         Canada                        3%

Swiss                     4%

(i)     Calculate 73 days forward Rate

(ii)   Calculate Forward premium/discount annualized.

(iii) Write your observation.

(iv) Which currency is at Premium?

(Ans.: USD           EUR          0.8483

Fwd Discount                              1%

Fwd Discount is approx equal to interest rate difference i.e. 4 – 3 = 1%

CAD is at Premium)

 

(3)   GBP USD             1.6700             Spot

GBP USD             1.6867             6 months

Interest rates         Brit                  4.00%

Find interest Rate in US of A per annum to avoid arbitrage.

(Ans.: 6.04%)

 

(4)   EUR USD             1.3000             Spot

EUR USD             1.3224             6 months

Interest rates         US of A          6.00%

Find interest Rate in Europe per annum to avoid arbitrage.

(Ans.: 2.51%)

 

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