The one-year interest rate in Germany 3.0 percent. The spot exchange rate is $1.20/€ and the...
The one-year interest rate in Germany 3.0 percent. The spot exchange rate is $1.20/€ and the one-year forward exchange rate is $1.18/€. What is the one-year interest rate be in the U.S.?
Multiple Choice
-
2.63%
-
4.75%
-
None of the options.
-
3.50%
-
1.28%
Homework Answers
As per interest rate parity,
Forward Rate = Spot Rate(1+Interest Rate US)/(1+Interest Rate Germany)
(1+Interest Rate US) = 1.20*1.03/1.18
= 4.7458%
i.e. 4.75%
Hence, the answer is 4.75%
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