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Suppose the U.S. 90-day Tbill rate is 5%; the Euro 90-day simple interest rate is 4.8%....

  1. Suppose the U.S. 90-day Tbill rate is 5%; the Euro 90-day simple interest rate is 4.8%. The forward ($/Euro) rate for Euros (to be delivered 90 days from now) is .6200. What would be a good guess as to what today’s spot exchange rate must be? Explain.
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Answer #1
Forward Exchange rate 1 Euro= 0.6200
U.S. 90 days T-bill rate 5%
Interest for 90 days 5%*90/365= 1.2329%
Euro simple interest raate = 4.80%
Interest for 90 days 4.80%*90/365= 1.1836%

we have calculated rate for 90 days. So n = 1

Forward rate as per Interest parity formula

Forward rate = spot rate * (1+ U.S. interest rate)^n / (1+Euro interest rate)^n

0.6200 = Spot rate* (1+1.2329%)^1 / (1+1.1836%)^1
Spot rate = 0.6200 * 1.01183562/1.0123287
Spot rate = 0.6196979702

So, Spot exchange rate for 1 Euro is $0.6197.
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