The spot exchange rate is CHF/$ =2.00. The one-year interest rate is equal to 4% in Switzerland and 8% in the United States. What should the current value of the forward exchange rate be?

Question

Quizplus · Accepted Answer

The Answer is According to the interest rate parity relation, the forward discount (or premium) is equal to the interest rate differential. With F being the current value of the one-year forward exchange rate,
we have:

F = 2 \cdot \frac { 1.04 } { 1.08 } = 1.9259

CHF/$.

The Spot Exchange Rate Is CHF/$ =2