Question

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Assume that interest rate parity holds and that 90-day risk-freesecurities yield 4% in the United...

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.

Solutions

Expert Solution

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.

jeff jeffy answered 2 years ago
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