Calculate the forward rate

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

1.     The interest rate in the $ is 15% and in the euro it is 9%. 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.

If possible can you give me the steps how we reached the forward rate.

An a brief explanation

Jun 22nd, 2015

Thank you for the opportunity to help you with your question!

The answer is 2.

Is the interest rate for a certain term that begins in the future and ends later. So if a business wanted to borrow money 1 year from now for a term of 2 years at a known interest rate today, then a bank can guarantee that rate through the use a forward rate contract using the forward rate as interest on the loan. Forward rate contracts, which are a common type of derivative, are based on forward rates. Forward rates are also necessary for evaluating bonds with embedded options.

The price of a bond is equal to the present value of all of its cash flows. The usual technique is to use a constant yield maturity (YTM) in calculating the present value of cash flow. However, the bond price equation can be used to calculate the forward rates as implied by the current market prices of different coupon bonds.

Bond Price Calculated Using a Constant Yield to Maturity
Bond Price=C1
(1+YTM)1
+C2
(1+YTM)2
+ ... +Cn
(1+YTM)n
+P
(1+YTM)n
  • C = coupon payment per period
  • P = par value of bond
  • n = number of years until maturity
  • YTM = yield to maturity

Please let me know if you need any clarification. I'm always happy to answer your questions.
Jun 22nd, 2015

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Jun 22nd, 2015
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Jun 22nd, 2015
Dec 6th, 2016
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