As of today, the spot exchange rate is €1.00 = $1.50 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

To calculate the one-year forward rate, we need to use the formula:

Forward Rate = Spot Rate x (1 + domestic interest rate) / (1 + foreign interest rate)

Using the given information: 
- Spot rate = €1.00 = $1.50
- Domestic interest rate (U.S.) = 2%
- Foreign interest rate (euro zone) = 3%

So, the one-year forward rate should be:

Forward Rate = $1.50 x (1 + 0.02) / (1 + 0.03) = $1.4854

Therefore, the correct answer is B.

As of Today, the Spot Exchange Rate Is €1