Question

Consider the following regarding forward exchange rates. If the forward exchange rate on a 3 month contract is 0.904, and the spot rate is currently 0.851, the implied APR is ___%. Round your answer to three decimal places.

Answer 1

Implied APR is 27.337 %
Given,
Forward exchange rate on a 3 month contract is 0.904,
and the spot rate is currently 0.851.
Applying the following formula we can calculate the implied APR
Implied APR = (forward / spot) raised to the power of (1 / time) - 1
where time = length of the forward contract in years
Forward = 0.904
Spot         = 0.851
Time        = 3 month
= 3/12 year
Now,
Implied APR = (0.904/0.851) raised to the power of {1 /(3/12)} - 1
or, Implied APR = (0.904/0.851)(12/3) - 1
or, Implied APR = (0.904/0.851)(4) - 1
or, Implied APR = (1.06228)(4) - 1
or, Implied APR = 1.27337 - 1
or, Implied APR = 0.27337
or, Implied APR = 27.337 %