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 dollar interest rates are lower than that of the euro, we need to subtract the forward points from the spot exchange rate to determine the forward exchange rate. Therefore, the choice that subtracts the bid-ask points from the spot exchange rate is the most valid. Option D subtracts the bid-ask points (13-10) from the spot exchange rate, making it the correct choice.

You Are an Active Currency Trader in the Dollar Versus