As of today,the spot exchange rate is €1.00 = $1.25 and the rates of inflation expected to prevail for the next year in the U.S.is 2 percent and 3 percent in the euro zone.What is the one-year forward rate that should prevail?

Question

Quizplus · Accepted Answer

The formula for calculating the one-year forward rate is:
Forward rate = spot rate x (1 + foreign interest rate) / (1 + domestic interest rate)
Using the information provided in the question, we can calculate the forward rate as:
Forward rate = €1.00 x (1 + 0.03) / (1 + 0.02) = €1.03 / $1.02 = €1.0098 = $0.9903 (rounded to four decimal places)
However, the question asks for the euro to dollar exchange rate, so we need to invert the result to get:
€1.00 = $1.25
€1.0098 = $1.25 * 0.9903 / 1.00 = $1.2379 (rounded to four decimal places) 
Therefore, the correct answer is A.

As of Today,the Spot Exchange Rate Is €1