Here is the answer for the question – Suppose the 5-year interest rate on a dollar-denominated pure discount bond is 4.5% p.a., whereas in France, the euro interest rate is 7.5% p.a. on a similar pure discount bond denom- inated in euros. If the current spot rate is. You’ll find the correct answer below
Suppose the 5-year interest rate on a dollar-denominated pure discount bond is 4.5% p.a., whereas in France, the euro interest rate is 7.5% p.a. on a similar pure discount bond denom- inated in euros. If the current spot rate is $1.08/e, what is the value of the forward exchange rate that prevents covered interest arbitrage?
The Correct Answer is
(1 + r$(t, 5))5 1.0455 F(t,5,$/e)=S(t,$/e)×(1+re(t,5))5 =1.08×1.0755 =0.9375
Reason Explained
(1 + r$(t, 5))5 1.0455 F(t,5,$/e)=S(t,$/e)×(1+re(t,5))5 =1.08×1.0755 =0.9375 is correct for Suppose the 5-year interest rate on a dollar-denominated pure discount bond is 4.5% p.a., whereas in France, the euro interest rate is 7.5% p.a. on a similar pure discount bond denom- inated in euros. If the current spot rate is
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