A European investor can earn a 4.75 percent annual interest rate in Europe or 2.75 percent per year in the United States. If the spot exchange rate is $1.58 per euro,at what one-year forward rate would an investor be indifferent between the U.S. and Japanese investments?

Question

Quizplus · Accepted Answer

To find the forward rate where the investor is indifferent, use the interest rate parity formula: Forward Rate = Spot Rate * (1 + Domestic Interest Rate) / (1 + Foreign Interest Rate). Here, Domestic is the U.S. and Foreign is Europe. Forward Rate = 1.58 * (1 + 0.0275) / (1 + 0.0475) = 1.5498.

A European Investor Can Earn a 4