The US dollar-euro spot exchange rate is $1.50/€.If the one-year simple interest rate on dollars is 1% and on euro is 2%,what is the one-year forward rate of dollars per euro?

Question

Quizplus · Accepted Answer

To find the one-year forward rate of dollars per euro, we need to use the interest rate parity formula:

F/S = (1 + Rd) / (1 + Rf)

Where F is the forward exchange rate, S is the spot exchange rate, Rd is the domestic interest rate (1% for dollars), and Rf is the foreign interest rate (2% for euros).

Plugging in the numbers, we get:

F/1.50 = (1 + 0.01) / (1 + 0.02)
F/1.50 = 1.01 / 1.02
F = 1.01 / 1.02 * 1.50
F = 1.4853

Therefore, the one-year forward rate of dollars per euro is 1.4853, which corresponds to choice B.

The US Dollar-Euro Spot Exchange Rate Is $1