Han Co wishes to predict the exchange rate between the dollar ($) and the euro (€), based on the following information: Spot exchange rate $1= €1.6515 Dollar interest rate 4.5% per year Euro interest rate 6.0% per year Which of the following is the one-year forward rate, using interest rate parity theory? O $1= €1.2386 O $1= €1.6752 O $1= €2.2020 O $1= €1.6281
Han Co wishes to predict the exchange rate between the dollar ($) and the euro (€), based on the following information: Spot exchange rate $1= €1.6515 Dollar interest rate 4.5% per year Euro interest rate 6.0% per year Which of the following is the one-year forward rate, using interest rate parity theory? O $1= €1.2386 O $1= €1.6752 O $1= €2.2020 O $1= €1.6281
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
![**Exchange Rate Prediction Using Interest Rate Parity Theory**
**Scenario:**
Han Co. wishes to predict the exchange rate between the dollar ($) and the euro (€), based on the following information:
- **Spot exchange rate:** $1 = €1.6515
- **Dollar interest rate:** 4.5% per year
- **Euro interest rate:** 6.0% per year
**Question:**
Which of the following is the one-year forward rate, using the interest rate parity theory?
1. $1 = €1.2386
2. $1 = €1.6752
3. $1 = €2.2020
4. $1 = €1.6281
Interest rate parity theory suggests that the difference in interest rates between two countries will be equal to the difference between the forward exchange rate and the spot exchange rate. The formula is given by:
\[ \text{Forward rate} = \text{Spot rate} \times \left(\frac{1 + \text{Interest rate of domestic currency}}{1 + \text{Interest rate of foreign currency}}\right) \]
For Han Co., the spot exchange rate and interest rates are provided, and you are to determine the forward rate from the given options.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F933b2e7c-bcb1-4a47-8bd3-8f81e6e7ee8a%2F8a0dc247-6ec4-477e-b02f-384c84c61ed6%2Fa7bq5yc_processed.jpeg&w=3840&q=75)
Transcribed Image Text:**Exchange Rate Prediction Using Interest Rate Parity Theory**
**Scenario:**
Han Co. wishes to predict the exchange rate between the dollar ($) and the euro (€), based on the following information:
- **Spot exchange rate:** $1 = €1.6515
- **Dollar interest rate:** 4.5% per year
- **Euro interest rate:** 6.0% per year
**Question:**
Which of the following is the one-year forward rate, using the interest rate parity theory?
1. $1 = €1.2386
2. $1 = €1.6752
3. $1 = €2.2020
4. $1 = €1.6281
Interest rate parity theory suggests that the difference in interest rates between two countries will be equal to the difference between the forward exchange rate and the spot exchange rate. The formula is given by:
\[ \text{Forward rate} = \text{Spot rate} \times \left(\frac{1 + \text{Interest rate of domestic currency}}{1 + \text{Interest rate of foreign currency}}\right) \]
For Han Co., the spot exchange rate and interest rates are provided, and you are to determine the forward rate from the given options.
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 3 steps with 2 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education