In Italy the annualized rate on a three-month government bond is 4% and in Canada the rate is 5%.The current spot rate is €0.6542/C$.Calculate the 3-month forward rate needed for interest rate parity to hold.

Question

Quizplus · Accepted Answer

To calculate this answer you need to use the interest rate parity formula and adjust the 6-month risk-free rates to 3-month risk-free rates.You should use the following formula to calculate the 3-month forward rate: (3-month forward/€0.6542/C$)= (1.01)/(1.0125).This gives you a 3-month forward rate of €0.6526/C$.

In Italy the Annualized Rate on a Three-Month Government Bond