Help solving problem

Business & Finance
Tutor: None Selected Time limit: 1 Day

     You know the following. The interest rate in the $ is 10% and in the euro it is 6%. If the spot ER is euro/$ 1 (meaning 1 euro for 1 dollar.) SHOW IN DETAIL what the forward rate will be.  Assume that interest rate parity in an absolute form holds true. EXPLAIN your answer.

The explanation of the answer can be three sentence

Jun 22nd, 2015

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Jun 22nd, 2015

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Jun 22nd, 2015

In other words, if S is the spot rate and F the forward rate, and rf and rd are foreign currency interest rates and domestic currency interest rates respectively, then:

fwd_rate_formula

Now here the spot euro/$ rate is 1 and the interest rates on euro and USD are 0.06% and 0.1% respectively, then calculate the euro/USD forward rate.

In this case the forward rate will be:

F = 1*[(1+0.06) / (1+0.1)]

F = 0.964



Jun 22nd, 2015

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Jun 22nd, 2015

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