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%