An investor wants to hold 200 euro two years from today.The spot exchange rate is $1.31 per euro.If the euro denominated annual interest rate is 3.0% what is the price of a currency prepaid forward?
A) $200
B) $206
C) $231
D) $247

Question

Quizplus · Accepted Answer

To calculate the price of a currency prepaid forward, we need to use the formula:
Forward = Spot x ((1 + r) ^ t)
where r is the annual interest rate and t is the time.
In this case, we have:
Forward = 1.31 x ((1 + 0.03) ^ 2) = $1.47
To get 200 euro in two years, the investor needs to buy 200/1.31 = $152.67 today. Therefore, the price of a currency prepaid forward is $152.67 x 1.47 = $224.83, which is closest to option D ($247).

An Investor Wants to Hold 200 Euro Two Years from Today.The