A bank has to submit a quote to a customer for buying Euro against Rupees. Thecustomer will have the option of taking delivery any time during the second month. Given thefollowing spot and forward rates, what rate should it quote? EUR/INRUSD/INR Spot : 55.20/55.30One month forward : 15/25Two month forward : 20/30EUR/USD Spot : 1.21/1.22One month forward : 15/10Two month forward : 20/15
Question
A bank has to submit a quote to a customer for buying Euro against Rupees. Thecustomer will have the option of taking delivery any time during the second month. Given thefollowing spot and forward rates, what rate should it quote? EUR/INRUSD/INR Spot : 55.20/55.30One month forward : 15/25Two month forward : 20/30EUR/USD Spot : 1.21/1.22One month forward : 15/10Two month forward : 20/15
Solution
The bank needs to quote the rate for buying Euro against Rupees for a two-month forward contract.
First, we need to find the two-month forward rate for EUR/USD. The quote given is 20/15. In currency exchange, the first number is the 'bid' price and the second is the 'ask' price. The bank would buy at the 'bid' price and sell at the 'ask' price. Since the bank is buying, we will use the 'bid' price of 1.20 (1.21 - 0.02).
Next, we need to find the two-month forward rate for USD/INR. The quote given is 20/30. Again, we will use the 'bid' price of 55.40 (55.20 + 0.20).
Finally, we multiply the two rates together to find the rate for EUR/INR. So, 1.20 * 55.40 = 66.48.
Therefore, the bank should quote a rate of 66.48 for a two-month forward contract for buying Euro against Rupees.
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