Question

Given the following FX quotes between Paris and New York:

Assumptions	Paris	New York
Spot Rate ($/€)	1.356	1.356
1-yr T-Bill rate	3.6%	4.5%
Expected Inflation rate	Unknown	1.30%

The expected 1-year forward exchange rate ($/€) today should be:

Hint: Refer International Fisher Effect

Select one:

a. 1.456

b. 1.256

c. 1.368

d. 1.305

e. None of the Above

Answer 1

Assumptions Spot Rate (S/) 1-yr T-Bill rate Expected Inflation rate Paris 1.356 0.036 Unknown New York 1.356 0.045 0.013 4 7 9 10 As pet IFE forward rate -C411+D5V(1+C5) 12 13