In: Finance
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?
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