The annualized rate of interest on three-month government bonds is 7% in Italy and the annualized rate on three-month government bonds is 4% in the United States.The current spot rate is $1.12/€.Using interest rate parity what is the implied three-month forward rate between the U.S.dollar and the Euro.

Question

Quizplus · Accepted Answer

In this problem you need to remember to divide the annualized rate of interest by 4,since we are looking for a three month forward rate.Once you do that,you just need to plug the information given into the interest rate parity formula.To calculate the answer you would set up the equation like this (Forward ($/€)/ $1.12/€)= (1.01/1.0175).Then you just solve for the Forward rate.

The Annualized Rate of Interest on Three-Month Government Bonds Is