The USD-EUR spot exchange rate is $1.50/€.If the two-year interest rate (in continuously-compounded and annualized terms)is 3% for EUR and 2% for USD,what are the two-year forward points ($/€)expressed as usual in basis points?
A)Zero
B)100
C)300
D)Cannot be calculated from the given data.

Question

Quizplus · Accepted Answer

The two-year forward points can be calculated using the interest rate parity formula, which in its continuous compounding form is: $F = Se^{(r_d - r_f)t}$, where $F$ is the forward rate, $S$ is the spot rate, $r_d$ is the domestic interest rate (USD in this case), $r_f$ is the foreign interest rate (EUR in this case), and $t$ is the time in years. Plugging in the given values: $F = 1.50e^{(0.02 - 0.03) \times 2} = 1.50e^{-0.02} ≈ 1.47$. The difference between the spot and forward rate is $-0.03$ USD/EUR, which in basis points (1 basis point = 0.0001) is -300. Since forward points are typically expressed as an absolute value, the answer is 300 basis points.

The USD-EUR Spot Exchange Rate Is $1