In: Finance
Assume that interest rate parity holds and that 90-day risk-free securities yield 4% in the United States and 4.5% in Germany. In the spot market, 1 euro equals $1.35.
What is the 90-day forward rate? Do not round intermediate calculations. Round your answer to four decimal places.
$
Is the 90-day forward rate trading at a premium or discount relative to the spot rate?
The 90-day forward rate is trading at a -Select-premiumdiscountItem 2 relative to the spot rate.
Fwd rate :
Acc to IRPT,
Fwd rate = Spot rate * [ (1+Hi) / ( 1 + Fi) ]
Hi = Int rate in US
Fi = Int rate Germany
Particulars | Amount |
Spot Rate | $ 1.3500 |
Hi | 1.000% |
Fi | 1.125% |
Home Country | US |
Foreign Country | Germany |
According to Int Rate parity Theorm,
Fwd rate After 1 Years = Spot rate * [ ( 1 + Hi ) ] / [ ( 1 + Fi )
]
= $ 1.35 * [ ( 1 + 0.01) ] / [ ( 1 + 0.0113 ) ]
= $ 1.35 * [ ( 1.01) ] / [ ( 1.0113 ) ]
= $ 1.35 * [ 1.01 ] / [ 1.0113 ]
= $ 1.35 * [ 0.9988 ]
= $ 1.3483
Spot rate = $1.35
Forward Rate = $ 1.3483
As Fwd Rate < Spot rate, Forward rate is trading at discount compared tospot Rate.