Question

Suppose the one-year forward $7€ exchange rate is $1.9 per euro and the spot exchange rate is $1.6 per euro. What is the forward premium on euros (the forward discount on dollars)? The forward premium on euros is 18.8 percent. (Give your answer as a percentage with one decimal and do not forget a negative sign, if appropriate.) Given the above information, what is the difference between the interest rate on one-year dollar deposits and that on one-year euro deposits (assuming no political risk)? The difference between the dollar interest rate and the euro interest rate R$ - Re = percent. (Give your answer as a percentage with one decimal and do not forget a negative sign, if appropriate.)

Answer 1

Answer:

Given:

Forward Exchange rate = $1.9 per euro

Spot exchange rate = $1.6 per euro

1. Forward premium = (1.9 – 1.6)/1.6 = 18.75%

2. R$ - R€ = ( F -S) / S = (1.9-1.6)/1.6 = 0.1875

The forward premium on euros is 18.8 percent.

The difference between the dollar interest rate and the euro interest rate R$ - Re = 0.1875