Question

The spot rate between the U.S. dollar and the New Zealand dollar is $1 = NZD1.3362. Assume the interest rate in the United States is 8 percent and in New Zealand is 4 percent.

What should be the 3-month forward exchange rate? (Do not round intermediate calculations. Round your answer to 4 decimal places.)

Answer 1

Solution:
	3-month forward exchange rate $1 = NZD 1.3231 this is indirect
	$0.7558 per NZD this is direct
Working Notes:
	Spot rate , $1 = NZD1.3362
	3-month forward exchange rate(FR) = ??
	In above Exchange rate ,$ is Base currency & NZD is Price currency
	As per IRP (interest rate parity)
	Forward rate (FR) = Spot rate (SR) x (1+ interest rate of NZD) / ( 1 + interest rate of $)
	3 m FR = 1.3362 x (1+ (4% x 3/12) ) / ( 1 + (8% x 3/12) )
	3 m FR = 1.3231
	3 m FR $1 = NZD 1.3231 indirect
For Per NZD	3m FR NZD 1 = $1/1.3231
	3m FR NZD 1 = $0.7558 direct
Notes:	3/12 is periodic adjustment for 3 month forward price formula, as interest are always stated in per annum basis.
Please feel free to ask if anything about above solution in comment section of the question.