# Forward rate calculation

FratBro23
Category:
Business & Finance
Price: \$5 USD

Question description

1You 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 formula to use is

\$P (1 + i\$) = \$P (€/\$ S) (1+ i)(1/€/\$ F) or

(i\$ – i)/(1 + i) = (€/\$S – €/\$ F)/ €/\$ F (Euro Terms) or

(i\$ – i)/(1 + i) = (\$/€ F – \$/€ S )/ \$/€S (Dollar Terms)

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