FINS 5512

Submission Question
z5093991
Week 8

Varun Abbineni

Information provided to us in the question:

EUR/GBP (Spot) = 0.8260-67 Here, 0.8260 is the bank's bid
price, and 0.8267 is the ask price. As the importer is looking to
buy GBP, the spot rate used to calculate the offered forward
rate is the bid price, which is 0.8260.
One-month German interest rate = 4.75%
=> No. of forward days = 30
One-month UK interest rate = 3.25%
=> No. of forward days = 30
[Note: The UK uses the 365 days per year convention, while
Germany uses the 360 days per year convention. This is reflected in
the calculation.]
Forward rate = S*[{1+(It*Forward days / days in year of term
currency)} / {1+(Ib*Forward days / days in year of base currency)}]
where S = Spot rate,
Ib = Interest rate of base currency,
It = Interest rate of terms currency.
[Note: As we have converted the UK rate to a 360 day rate, we use
360 days in the formula]
=> Forward rate = 0.8260*[{1+(0.0325*30/365)}/
{1+(0.0475*30/360)}]
~ 0.82494
Hence, the forward rate offered by the bank is ~ EUR/GBP 0.8249.