Whether the interest rate is higher in United States or in Euro zone when the spot price of the euro is $1.10 and 1 year future price is $1.15. Introduction: Future spot exchange rate: When the spot rate is multiplied by the ratio of interest rates and adjusted till expiration time, we get the value of forward rate. The formula used will be as follows: F 0 = E 0 ( 1 + r f 1 + r h ) T

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Chapter 23, Problem 10PS

Summary Introduction

To evaluate: Whether the interest rate is higher in United States or in Euro zone when the spot price of the euro is $1.10 and 1 year future price is $1.15.

Introduction:

Future spot exchange rate: When the spot rate is multiplied by the ratio of interest rates and adjusted till expiration time, we get the value of forward rate. The formula used will be as follows:

F0=E0( 1+ r f 1+ r h )T

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