Question

The spot exchange rate is $1.16 per euro, and the six-month risk-free interest rates are 2% in the U.S. and 1% in the eurozone, both with continuous compounding. What is the six-month forward rate?

Answer 1

Spot rate = 1.16 per euro | 6-month Rf in US = 2%

6-month Rf in Eurozone = 1%

Using interest rate parity, we can calculate the Six-month forward rate.

Formula: Forward Rate = Spot Rate * (1 + Domestic Interest rate) / (1+Foreign Interest rate)

For this case, we will use continuous compounding instead of normal compounding.

F = 1.16 * e^{​​​​​​2%}/ e^{​​​​​​1%}

Solving the above equation, we get the below Forward Rate

Six month Forward Rate = 1.17165 or $ 1.17 per euro