The 1 year forward rate is CAD 1.36/Euro. The Canadian risk free rate is 3.4%, the...
The 1 year forward rate is CAD 1.36/Euro. The Canadian risk free rate is 3.4%, the Euro risk free rate is 2.6%. If the Law of One Price holds, what should the spot exchange rate be, in CAD per Euro?
Homework Answers
Forward rate = Spot rate (1+ Ci) /(1+Ei)
1.36 = Spot rate (1+ .034) /(1+.026)
1.36 =spot rate * 1.034 /1.026
Spot rate = 1.36*1.026 /1.034
= CAD 1.34948 per Euro (rounded to 1.3495 )
Note:
since the quote asked for in question is CAD per Euro so we will take Canadian interest rate in numerator and Euro in denominator .
Formula :
Forward rate x/y = spot rate x/y [(1+ix)/(1+iy)]
where X =CAD
Y=Euro
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