18.There are two countries, country A and country B, the 3-month interest rate in country A is 3.21% and the 3month interest rate in country B is 3.62%. The current exchange rate A/B is 1.2759. (Assume 90 days for the 3-month period and 360 days in a year) a)Calculate the 3-month forward exchange rate:b) If an exporter from country A was able to lock in a forward quotation to convert their $640000 foreign currency proceeds into local currency, how much would they receive?
Question
18.There are two countries, country A and country B, the 3-month interest rate in country A is 3.21% and the 3month interest rate in country B is 3.62%. The current exchange rate A/B is 1.2759. (Assume 90 days for the 3-month period and 360 days in a year) a)Calculate the 3-month forward exchange rate:b) If an exporter from country A was able to lock in a forward quotation to convert their $640000 foreign currency proceeds into local currency, how much would they receive?
Solution
a) To calculate the 3-month forward exchange rate, we use the formula:
F = S * (1 + i_d * (t/360)) / (1 + i_f * (t/360))
where: F is the forward exchange rate S is the spot exchange rate i_d is the interest rate in the domestic country (country A) i_f is the interest rate in the foreign country (country B) t is the time in days
Substituting the given values:
F = 1.2759 * (1 + 0.0321 * (90/360)) / (1 + 0.0362 * (90/360))
After performing the calculations, we get the forward exchange rate.
b) To calculate how much the exporter would receive, we multiply the amount of foreign currency by the forward exchange rate.
Amount received = $640000 * F
After substituting the value of F from the previous calculation, we get the amount the exporter would receive.
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