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% and 3% in the euro zone. What is the one-year forward rate that should prevail?

Question

Quizplus · Accepted Answer

The forward rate can be calculated using the formula: Forward Rate = Spot Rate * (1 + Inflation Rate of Domestic Currency) / (1 + Inflation Rate of Foreign Currency). Here, the domestic currency is the euro, and the foreign currency is the dollar. So, Forward Rate = 1.25 * (1 + 0.02) / (1 + 0.03) = 1.2379.

As of Today, the Spot Exchange Rate Is €1