Foreign Exchange Market Fundamentals and Exchange Rate Mechanics
This domain tests how KRW rates are quoted, how spot and forward prices are derived, and how the market average rate feeds customer pricing. Expect calculation items as well as conceptual ones on market structure.
Quoting and market structure
Korea operates a free-floating exchange rate regime. The won is quoted as KRW per USD, so a rising number means won depreciation. The prior day's weighted average of interbank USD/KRW trades is published as the market average rate (MAR, 매매기준율). Customer rates are set as MAR plus or minus a spread, not at MAR itself. Cross rates are usually computed through USD unless a direct market exists.
Forward pricing
Forward points come from covered interest parity. With S as KRW per USD, F = S × (1 + i_KRW × days/360) / (1 + i_USD × days/360). Higher KRW interest rates produce a forward USD discount (negative points); higher USD rates produce a forward premium.
Worked example
Spot 1,300.00, KRW 3-month rate 3.50%, USD 3-month rate 5.00%, 90 days. F = 1,300 × (1 + 0.035 × 90/360) / (1 + 0.05 × 90/360) = 1,300 × 1.00875 / 1.0125 = 1,295.19. The importer locking this rate pays KRW 1,295.19 per USD, 4.81 won below spot, because the USD interest advantage is offset by a forward discount.
Traps
- Quoting USD/KRW instead of KRW/USD and then inverting the interest differential.
- Using 365 days when the market convention is 360.
- Applying MAR to a customer transaction without the bid-offer spread.
- Treating a forward premium as a forecast rather than an interest-rate parity result.