Question

Suppose that the one-year interest rate is 3.0 percent in Italy, the spot exchange rate is 0.676 €/$, and the one-year forward exchange rate is 0.694 €/$. What must one-year interest rate be in the United States?

Answer #1

Forward exchange rate | = | Spot Exchange rate*((1+Interest rate of price currency country)/(1+Interest rate of base currency country)) | ||||||||||||

0.694 | = | 0.676 | * | ((1+0.03)/(1+interest rate of base currency country)) | ||||||||||

1.02663 | = | 1.03/(1+interest rate of base currency country) | ||||||||||||

1+interest rate of base currency country | = | 1.03/1.02663 | ||||||||||||

1+interest rate of base currency country | = | 1.003283 | ||||||||||||

Interest rate of base currency country | = | 0.003283 | ||||||||||||

Thus, | ||||||||||||||

Interest rate in United state being the country of base
currency is |
0.33% |
|||||||||||||

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--------------------------------------------------------------------
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