Ask Question
3 September, 06:23

The current USD/euro exchange rate is 1.4000 dollar per euro. The six month forward exchange rate is 1.3950. The six month USD interest rate is 1% per annum continuously compounded. Estimate the six month euro interest rate. If the six-month euro interest rate is rf th

+4
Answers (1)
  1. 3 September, 08:11
    0
    the six month euro interest rate is 1.36%

    Explanation:

    Spot exchange rate: 1.4 USD / EUR

    6 month forward rate: 1.3950 USD/EUR

    Domestic interest rate: 1% pa

    Foreign interest rate: the six month euro interest rate?

    We have the formula:

    Forward rates = Spot rate * (1+domestic interest rate) / (1+foreign interest rate)

    ⇔ 1.3950 = 1.4 * (1+1%) / (1+foreign interest rate)

    ⇔ 1+foreign interest rate = 1.4 * (1+1%) / 1.3950

    ⇔foreign interest rate = 1.01362 - 1 = 0.01362

    ⇒ the six month euro interest rate is 1.36%
Know the Answer?
Not Sure About the Answer?
Find an answer to your question ✅ “The current USD/euro exchange rate is 1.4000 dollar per euro. The six month forward exchange rate is 1.3950. The six month USD interest ...” in 📘 Business if you're in doubt about the correctness of the answers or there's no answer, then try to use the smart search and find answers to the similar questions.
Search for Other Answers