Question

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

Answer 1

Answer:

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.