The risk free rate in the US is 2.5% and the risk free rate in Europe is 3.2%.If the spot rate of dollars per euro is 1.32,what is the likely forward rate in terms of dollars per euro?

Question

Quizplus · Accepted Answer

To calculate the forward rate, we need to use the interest rate differential between the two countries. 
The interest rate differential is: 3.2% - 2.5% = 0.7%
We then add this differential to the spot rate as follows: 
1.32 + (1.32 x 0.007) = 1.31
Therefore, the likely forward rate in terms of dollars per euro is 1.31, which is Choice B.

The Risk Free Rate in the US Is 2