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Consider the following: risk-free rate in the United States 0.01/year, risk-free rate in Euro 0.03/year, spot...

Consider the following: risk-free rate in the United States 0.01/year, risk-free rate in Euro 0.03/year, spot exchange rate 1.350 USD for 1 EURO. What should be the proper EUR for USD forward price for a 1-year contract?

  1. 0.7262
  2. 0.7557
  3. 0
  4. 0.7407
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Answer #1

Spot rate = 1 Euro = 1.350 USD

i.e. 1/1.350 Euro = 1 USD

i.e. 0.7407 Euro = 1 USD

Fair forward Rate = Spot Rate (1+Interest Rate Euro)/(1+Interest rate USD)

= 0.7407*(1+0.03)/(1+0.01)

= Euro 0.7554/Dollar

i.e. Euro 0.7557/USD approx.

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