Suppose that the Euro-denominated interest rate is 1.5%, the dollar- denominated interest rate is 1%, and...

Suppose that the Euro-denominated interest rate is 1.5%, the dollar-
denominated interest rate is 1%, and the current exchange rate is 1.42 dollars per
Euro. What is the 6-month forward exchange rate in Vancouver (i.e., C$ per 1
Euros)? What is the 6-month forward exchange rate in Milan (i.e., Euros per 1
C$)? [Assume that interest rates are annualized and continuously compounded.]

Expert Solution

6-month forward exchange rate in Vancouver = spot exchange rate of C$ per 1 Euros * e^r_dt / e^r_et

where r_d = dollar interest rate (this is 1%, or 0.01)

r_e = euro interest rate (this is 1.5%, or 0.015)

t = time in years (this is 6/12, or 0.5)

6-month forward exchange rate in Vancouver = 1.42 * e^(0.1*0.5) / e^(0.015*0.5)

6-month forward exchange rate in Vancouver = C$4.4165 per 1 Euro

6-month forward exchange rate in Milan = spot exchange rate of Euro per 1 C$ * e^r_et / e^r_dt

where r_d = dollar interest rate (this is 1%, or 0.01)

r_e = euro interest rate (this is 1.5%, or 0.015)

t = time in years (this is 6/12, or 0.5)

spot exchange rate of Euro per 1 C$ = 1 / spot exchange rate of C$ per 1 Euros = 1 / 1.42 = 0.704225

6-month forward exchange rate in Milan = 0.704225 * e^(0.015*0.5) / e^(0.1*0.5)

6-month forward exchange rate in Milan = 0.7060 Euros per 1 C$

jeff jeffy answered 7 months ago

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