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