CFA
Reading 19
EXCHANGE RATE
CALCULATIONS
1. (C) 0.70186.
Explanation
First, convert GBP/USD 0.7775 to 1/0.7775 = USD/GBP 1.28617.
Then, divide USD/GBP 1.28617 by CAD/GBP 1.8325 = USD/CAD 0.70187.
(Module 19.1, LOS 19.a)
2. (C) premium of 1% to the GHI.
Explanation
The EUR is at a forward premium to the GHI because the EUR/GHI forward
rate is less than the EUR/GHI spot rate. The base currency, GHI, is at a forward
discount of forward/spot – 1 = 4.2800 / 4.3250 – 1 = –1.04%. The EUR is at a
forward discount to the DEF and forward premium to the JKL.
(Module 19.1, LOS 19.b)
3. (B) 1.3425, and the USD is at a forward premium.
Explanation
For an exchange rate quoted to four decimal places, each forward point
represents 0.0001. The 6-month forward exchange rate is 1.3500 − 0.0075 =
1.3425 USD/EUR. The USD is expected to appreciate against the EUR and is
trading at a forward premium.
(Module 19.1, LOS 19.b)
4. (B) greater than the 3-month JPY interest rate.
Explanation
If the no-arbitrage forward JPY/GBP rate is less than the spot rate, the interest
rate for JPY must be less than the interest rate for GBP.
(Module 19.1, LOS 19.b)
Economics 1 Exchange Rate Calculations
CFA
5. (B) 3.00 ATH/MOR.
Explanation
The ATH/MOR cross rate = 9.00 ATH/GBP × (1 / 1.50) GBP/USD × (1 / 2.00)
USD/MOR = 3.00 ATH/MOR.
(Module 19.1, LOS 19.a)
6. (B) 0.6431.
Explanation
The one year forward rate is 0.6243 × (1 + 0.03016) = 0.6431.
(Module 19.1, LOS 19.b)
7. (B) 4.0000.
Explanation
Invert the first quote to read USD/GBP 0.5000. Then, 0.5000 × 8.0000 = 4.0000
MXN/GBP.
(Module 19.1, LOS 19.a)
8. (A) 0.0227 PSG/TRT.
Explanation
The TRT/PSG cross rate is 5.5 × 8.0 = 44 TRT/PSG. Because the answer
choices are quoted as PSG/TRT, we need to invert this result: 1 / 44 = 0.0227
PSG/TRT.
(Module 19.1, LOS 19.a)
9. (A) 0.1432.
Explanation
The cross rate between USD and DKK is calculated in the following manner:
(USD/JPY)(JPY/DKK) = (1 / 115.2200) × 16.4989 = USD/DKK 0.1432
(the Yen cancels out)
(Module 19.1, LOS 19.a)
10. (A) 1.2761 USD/EUR.
Explanation
Each "point" is 0.0001. Thus, +12.4 points would add 0.00124 to the spot
exchange rate:
1.2749 + 0.00124 = 1.27614.
(Module 19.1, LOS 19.b)
Economics 2 Exchange Rate Calculations
CFA
11. (B) risk-free interest rates.
Explanation
Investing the domestic currency at the domestic interest rate should earn the
same return as buying a foreign currency at the spot exchange rate, investing at
the foreign interest rate, and selling the foreign currency proceeds at the
forward exchange rate. If both currencies trade freely and participants can enter
forward contracts, arbitrage trading will cause the percentage difference
between the forward and spot exchange rates to be approximately equal to the
difference between interest rates in the two countries.
(Module 19.1, LOS 19.b)
12. (C) premium of 110 points and the CAD is at a forward discount to the CHF.
Explanation
Because the forward CAD/CHF exchange rate is higher than the spot rate, the
quote is a forward premium. Forward points represent 0.0001 for an exchange
rate quoted to four decimal places. Here, the forward discount is 1460 − 1350 =
110 points. The base currency, the CHF, is at a forward premium to the CAD,
therefore the CAD is at a forward discount to the CHF.
(Module 19.1, LOS 19.b)
13. (B) 1.2481.
Explanation
The one year forward is 1.1132 + (1349/10,000) = 1.2481.
(Module 19.1, LOS 19.b)
14. (B) greater than the G/H spot rate.
Explanation
If the interest rate in Country G is greater than the interest rate in Country H, the
numerator is greater than the denominator on the right side of the equation. The
left side must have the same relationship, so the forward rate must be greater
than the spot rate.
(Module 19.1, LOS 19.b)
15. (C) 1.2029.
Explanation
The forward rate for CHF/EUR is 0.8342 × (1 − 0.00353) = 0.8313. The 1-year
forward EUR/CHF exchange rate is 1 / 0.8313 = 1.2030.
(Module 19.1, LOS 19.b)
Economics 3 Exchange Rate Calculations
CFA
16. (B) 0.9850.
Explanation
For an exchange rate quoted to four decimal places, forward points are
expresse in units of 0.0001.
The 60-day forward rate is 0.9875 + 0.0001(−25) = 0.9850.
(Module 19.1, LOS 19.b)
17. (C) is less than spot MNO/PQR.
Explanation
Based on the no-arbitrage relationship between spot rates, forward rates, and
interest rates, if the interest rate for the base currency is greater than the
interest rate for the price currency, the forward exchange rate is less than the
spot exchange rate.
(Module 19.1, LOS 19.b)
18. (C) 1.3333.
Explanation
For the Level I CFA exam, we quote foreign exchange rates as units of the price
currency per one unit of the base currency. Here we are given MXN/USD = 8
and PLN/USD = 6, and we are asked to calculate MXN/PLN.
The cross-rate MXN/PLN = MXN/USD × USD/PLN, which equals 8 × 1/6 = 1.3333.
(Module 19.1, LOS 19.a)
19. (C) 1.7568.
Explanation
(USD/CHF 1.6250) / (USD/CAD 0.9250) = CAD/CHF 1.7568
(Module 19.1, LOS 19.a)
20. (A) Japan is less than in the Eurozone.
Explanation
If the quote is in terms of JPY per EUR, this implies that the JPY is expected to
appreciate relative to the EUR. There will be no arbitrage opportunity only if the
interest rate in Japan is lower than the interest rate in the Eurozone.
(Module 19.1, LOS 19.b)
21. (C) 0.6196.
Explanation
For currency cross rate calculations, the recommended approach is to set up
the given rates such that cross-multiplying will result in the exchange rate the
Economics 4 Exchange Rate Calculations
CFA
question is asking for. In this case, GBP/USD = GBP/CAD × CAD/USD.
GBP/CAD = 1 / 2.5207 = 0.3967
CAD/USD = 1 / 0.6403 = 1.5618
GBP/USD = 0.3967 × 1.5618 = 0.6196
Alternatively, USD/CAD 0.6403 × CAD/GBP 2.5207 = USD/GBP 1.6140, and
GBP/USD = 1 / 1.6140 = 0.6196.
(Module 19.1, LOS 19.a)
22. (C) 1.2055.
Explanation
The 90-day forward CHF/EUR exchange rate is 1.2025 × 1.0025 = 1.20551.
The EUR is at a forward premium to the CHF.
(Module 19.1, LOS 19.b
Economics 5 Exchange Rate Calculations
