Today's spot exchange rate S_A is $1.30 per euro in American terms.The continuously compounded annual risk-free interest rates are r = 4 percent in the United States (domestic)and r_E = 3 percent in the Eurozone.Then a trader using the cost-of-carry model will quote the six-month forward rate in American terms as:

Question

Quizplus · Accepted Answer

The cost-of-carry model for forward rate pricing, especially in the context of foreign exchange, can be represented by the formula: $F = S \times e^{(r_d - r_f) \times t}$, where $F$ is the forward rate, $S$ is the spot rate, $r_d$ is the domestic interest rate, $r_f$ is the foreign interest rate, and $t$ is the time to maturity in years. Given the spot rate $S = 1.30$, $r_d = 0.04$, $r_f = 0.03$, and $t = 0.5$ (for six months), we can calculate the forward rate as follows: $F = 1.30 \times e^{(0.04 - 0.03) \times 0.5} = 1.30 \times e^{0.005} \approx 1.3065$.

Today's Spot Exchange Rate SA Is $1

Today's Spot Exchange Rate S_A Is $1