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A US importer of German cars wants to arrange a forward contract to buy euros in...

A US importer of German cars wants to arrange a forward contract to buy euros in half a year. The interest rates for investments in US dollars and euros are rUSD = 4% and rEUR = 3%, respectively, the current exchange rate being 0.9 euros to a dollar. What is the forward price of euros expressed in dollars (that is, the forward exchange rate)?

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Answer #1

Fair forward rate as per Interest rate parity = Spot Rate*(1+Interest Rate Euro)/(1+Interest Rate USD)

= 0.9(1+3*1/2)/(1+4%*1/2)

= Euro 0.895588/$

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