Suppose the spot exchange rate is EUR/USD 1.0991. The 1-year interest rate in the U.S. is 4.30% and the 1-year euro interest rate is 3.20%. Your U.S. based firm has an interest payment of EUR 600,000 due in one year. You are concerned that the value of the euro will increase over the next year and decide to limit your exchange rate risk by entering into a forward contract to purchase EUR 600,000 in one year. What do you expect the forward exchange rate to be for the contract? A. EUR/USD 1.0875 B. EUR/USD 1.0936 C. EUR/USD 1.1108 D. EUR/USD 1.1262
Suppose the spot exchange rate is EUR/USD 1.0991. The 1-year interest rate in the U.S. is 4.30% and the 1-year euro interest rate is 3.20%. Your U.S. based firm has an interest payment of EUR 600,000 due in one year. You are concerned that the value of the euro will increase over the next year and decide to limit your exchange rate risk by entering into a forward contract to purchase EUR 600,000 in one year. What do you expect the forward exchange rate to be for the contract? A. EUR/USD 1.0875 B. EUR/USD 1.0936 C. EUR/USD 1.1108 D. EUR/USD 1.1262
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Question
Suppose the spot exchange rate is EUR/USD 1.0991. The 1-year interest rate in the U.S. is 4.30% and the 1-year euro interest rate is 3.20%. Your U.S. based firm has an interest payment of EUR 600,000 due in one year. You are concerned that the value of the euro will increase over the next year and decide to limit your exchange rate risk by entering into a forward contract to purchase EUR 600,000 in one year. What do you expect the forward exchange rate to be for the contract?
A. |
EUR/USD 1.0875 |
|
B. |
EUR/USD 1.0936 |
|
C. |
EUR/USD 1.1108 |
|
D. |
EUR/USD 1.1262 |
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