The US risk-free rate is 5% while the risk-free rate in the eurozone is 7%. If...
The US risk-free rate is 5% while the risk-free rate in the eurozone is 7%. If the spot rate is €0.90/$ then what should the one year forward rate be?
Multiple Choice:
About €0.9373/$
About €0.9171/$
About $1.2263/€
About €0.9237/$
About $1.1747/€
Homework Answers
Ans: About €0.9171/$
Spot Rate
1 $ = € 0.90
One year forward rate
1 $ = € 0.90 * (1 + Interest Rate of Overseas Country) / ( 1 + Interest rate of Domestic Country)
1 $ = € 0.90 * (1 + 7%) / ( 1 + 5%)
1 $ = € 0.9171
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