Suppose the current exchange rate between Euro and YEN is 0.02.

Suppose the current exchange rate between Euro and YEN is 0.02. The euro-denominated annual continuously compounded risk-free rate is 4% and the yen-dominated annual continuously compounded risk- free rate is 1%. What are the 6-month euro/yen and yen/euro forward prices?

Solutions

Expert Solution

Spot price = 0.02 Euro/Yen

Forward price = Spot * e^[(euro-denominated rate - yen denominated rate)* 0.5]

Forward price = 0.02 * e^[(0.04 - 0.01) * 0.5]

Forward price = 0.02 * e^[0.015]

Forward price = 0.02030226129 Euro/Yen

Spot price =1/0.02 Yen/Euro

Spot price = 50 Yen/Euro

Forward price = Spot * e^[(Yen-denominated rate - Euro denominated rate)* 0.5]

Forward price = 50 * e^[(0.01 - 0.04) * 0.5]

Forward price = 50 * e^[-0.015]

Forward price = 49.2555969802 Yen/Euro

jeff jeffy answered 1 year ago

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