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The current USD/EUR exchange rate is 1.4050 dollar per EUR. The six month forward exchange rate...

The current USD/EUR exchange rate is 1.4050 dollar per EUR. The six month forward exchange rate is 1.3600. The 10-month USD interest rate is 7% per annum continuously compounded. Estimate the 10-month EUR interest rate. Answer with 4 digit decimal accuracy.

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Answer #1

Spot Exchange Rate = 1.4050 USD/EUR

Six month Forward Rate: 1.3950 USD/EUR

Domestic Interest Rate = 7% per annum

Foreign Interest Rate = Ten Month EUR Interest Rate

Formula:

Forward Rates = Spot Rate*(1+Domestic Interest Rate)/(1+Foreign Interest Rate)

=> 1.3950 = 1.4050*(1+7%)/(1+Foreign Interest Rate)

=> 1+Foreign Interest Rate = 1.4050*(1+7%)/1.3950

=> 1+ Foreign Interest Rate = 1.4050+0.09835/1.3950

=> Foreign Interest Rate = 1.0756-1

=> Foreign Interest Rate = 0.0756

Therefore, Ten Month EUR Interest Rate is 7.5520%

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