A Bank Has Been Asked to Provide a Three-Month Forward

question 35

Multiple Choice

A bank has been asked to provide a three-month forward EUR/USD 'buy' quote for a corporate client.The following information is available to the FX dealer at the bank:
$$\begin{array} { | l | l | l | } \hline & { \text { Bid } } &{ \text { Offer } } \\\hline \text { Spot EURUSD } & 1.0770 & 1.0782 \\\hline \text { 3-month US interest rate } & 3.75 \% \text { p.a. } & 3.85 \% \text { p.a. } \\\hline \text { 3-month euro interest rate } & 2.65 \% \text { p.a. } & 2.75 \% \text { p.a. } \\\hline\end{array}$$
Calculate the bid and ask a three-month forward rate.

• A) EUR/USD 1.0796-1.0781
• B) EUR/USD 1.0797-1.0782
• C) EUR/USD 1.0738-1.0755
• D) EUR/USD 1.0743-1.0750

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Definitions:

Binding Agreement

A contract or agreement that is legally enforceable in a court of law, implying that all parties have agreed to the terms and conditions.

Variable Interest

Interest that can change over the lifetime of a loan, credit line, or other form of financing, usually linked to a fluctuating benchmark rate.