Problem 17-12 Interest Rate Parity Assume that interest rate parity holds and th

Question

Problem 17-12
Interest Rate Parity

Assume that interest rate parity holds and that 90-day risk-free securities yield 5% in the United States and 5.5% in Germany. In the spot market, 1 euro equals $1.34 dollar.

Problem 17-12
Interest Rate Parity

Assume that interest rate parity holds and that 90-day risk-free securities yield 5% in the United States and 5.5% in Germany. In the spot market, 1 euro equals $1.34 dollar.

Is the 90-day forward rate trading at a premium or discount relative to the spot rate?
-Select-premiumdiscountItem 1  

What is the 90-day forward rate? Round your answer to four decimal places.
$   

Explanation / Answer

Assume that interest rate parity holds and that 90-day risk-free securities yield 5% in the United States and 5.5% in Germany. In the spot market, 1 euro equals $1.34 dollar.

Is the 90-day forward rate trading at a premium or discount relative to the spot rate?

Discount

Note : Since interest rate of Germany is higher than US interest rate than Dollar will appreciate and Euro will be declined

What is the 90-day forward rate? Round your answer to four decimal places

90-day forward rate = Spot rate*((1+interest rate in Us)^(90/360))/((1+interest rate in Euro)^(90/360))

90-day forward rate = 1.34*((1+5%)^(90/360))/((1+5.5%)^(90/360))

90-day forward rate = 1.3384

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