Angelinelyt
New Member
hi David
Please can you explain when do we use the following formulas for interest rate parity :
You are examining the exchange rate between the U.S. dollar and the euro and are given the following information regarding the USD/EUR exchange rate and the respective domestic risk-free rates:
Current USD/EUR exchange rate is 1.25
Current USD-denominated 1-year risk-free interest rate is 4% per year Current EUR-denominated 1-year risk-free interest rate is 7% per year
According to the interest rate parity theorem, what is the 1-year forward USD/EUR exchange rate?
a. 0.78 b. 0.82 c. 1.21 d. 1.29
Correct answer: c
Explanation: The forward rate, FT, is given by the interest rate parity equation:
Ft =S0 * e(r-rf)T
where
S0 is the spot exchange rate,
r is the domestic (USD) risk-free rate, and rf is the foreign (EUR) risk-free rate
T is the time to delivery
Please can you explain when do we use the following formulas for interest rate parity :
- Ft =S0 * e(r-rf)T and
- Forward = Spot x (1+domestic interest rate)/(1+foreign interest rate)
You are examining the exchange rate between the U.S. dollar and the euro and are given the following information regarding the USD/EUR exchange rate and the respective domestic risk-free rates:
Current USD/EUR exchange rate is 1.25
Current USD-denominated 1-year risk-free interest rate is 4% per year Current EUR-denominated 1-year risk-free interest rate is 7% per year
According to the interest rate parity theorem, what is the 1-year forward USD/EUR exchange rate?
a. 0.78 b. 0.82 c. 1.21 d. 1.29
Correct answer: c
Explanation: The forward rate, FT, is given by the interest rate parity equation:
Ft =S0 * e(r-rf)T
where
S0 is the spot exchange rate,
r is the domestic (USD) risk-free rate, and rf is the foreign (EUR) risk-free rate
T is the time to delivery