In early 2011, the British pound (GBP) to New Zealand dollar (NZD) spot exchange rate was 2.0979. LIBOR interest rates, quoted on a 360-day year basis, were 1.6025% for the British pound and 3.2875% for the New Zealand dollar. The 180-day forward points (scaled up by four decimal places) in G BP/NZD would be closest to:
B is correct. Covered interest arbitrage will ensure identical terminal values by investing the same initial amounts at the respective country's domestic interest rates:
GBP investment:₤2.0979 x (1 + 0.016025 × 180/360) =₤2.1147
NZD investment: NZ$1 x (1 + 0.032875 × 180/360) = NZ$1.0164
The forward rate is determined by equating these two terminal amounts:
GBP/NZD forward Rate =₤2.1147/NZ$1.0164 =₤2.0806/NZ$
Forward points = (Forward -Spot) × 10,000 = (2.0806- 2.0979) x 10,000 = -173.0.