Consider a bank dealer who faces the following spot rates and interest rates.What should he set his 1-year forward ask price at?

Question

Quizplus · Accepted Answer

To determine the 1-year forward ask price, the bank dealer should use the following formula:
F = S(1+rdomestic)t / (1+rforeign)t
Where, 
S = current spot rate
rdomestic = domestic interest rate
rforeign = foreign interest rate
t = time to maturity

Using the given values, we get:
F = 1.4328(1+0.025)1 / (1+0.02)1 = 1.4662/€

Therefore, the bank dealer should set his 1-year forward ask price at $1.4662/€, which is option C.

Consider a Bank Dealer Who Faces the Following Spot Rates