You are an active currency trader in the dollar versus euro market.The current market quote ($/€)is 1.51-1.53.You determine the difference between the spot exchange rate and forward exchange rate using the forward points in the market.If dollar interest rates are lower than that of the euro,which of the following scenarios relating to forward exchange points is most valid in determining the forward exchange rate?
A)Add the following bid-ask points to spot to get the forward exchange rate: 10-13.
B)Subtract the following bid-ask points to spot to get the forward exchange rate: 10-13.
C)Add the following bid-ask points to spot to get the forward exchange rate: 13-10.
D)Subtract the following bid-ask points to spot to get the forward exchange rate: 13-10.

Question

Quizplus · Accepted Answer

Since the euro offers higher interest rates,it will trade at a discount in the forward exchange market.Hence,we need to subtract points.If we subtract 10-13,as in choice (b),we will end up with a 1.41-1.40 forward FX rate,where the bid is greater than the ask,and is therefore meaningless.However,in the case of choice (d),we will get a 1.38-1.43 forward FX rate,which is sensible.

You Are an Active Currency Trader in the Dollar Versus