FX Forwards and Interest Rate Logic: Where Candidates Go Wrong In The ACI Dealing Certificate

Many candidates can calculate FX forwards but fail due to flawed logic.

Higher interest rate currencies trade at a forward discount.

Lower interest rate currencies trade at a forward premium.

This principle rescues multiple exam questions even when calculations are forgotten.

In other words, the currency with the higher interest rate will have the weaker forward FX rate.

You will almost certainly be asked to price up forward FX in the exam. Even though you will be given the formula, you should know how to do this on your own.

Watch out for day count conventions when pricing up your answer.

A higher interest rate currency typically trades at a:

A. Forward premium

B. Forward discount

C. Spot premium

D. Fixed rate

✅ Answer: B