Question

During January 2005, an Italian investor investing in the Italian stock market earned a return of 1.47%. During the same month, an American investor investing in the Italian stock market earned a return of –2.358%. The U.S. dollar-Euro exchange rate at the end of January 2005 was 1.3035 $/€. What was the U.S. dollar-Euro exchange rate ($/€) at the end of December 2004? Please show work thank you

Answer 1

Rate of return in Italian stock market (r) = 1.47%

Rate of return in American stock market (r) = 2.358%

months gap =1

time of year = 1/12 year

Forward rate A Euro = 1.3035 Dollar

Forward rate of Euro formula = Spot rate*(1+(rate of return of American market*time))/(1+(rate of return of Italian market * time))

1.3035 = spot rate*(1+(2.358%*1/12))/(1+(1.47%*1/12))

1.3035=spot rate*1.000739095

Spot rate = 1.3035/1.000739095

=1.302537301

So Spot rate as on dec 31, 2004 will be 1.3025 Dollar per Euro