Assume that the rates shown in the table below accurately refl ect current conditions in the fi
Question:
Assume that the rates shown in the table below accurately refl ect current conditions in the fi nancial markets.
Dollar/Euro Spot Rate 1.21 Dollar/Euro 1-Year Forward Rate 1.18 1-Year Deposit Rate:
Euro 3%
US 2%
In the table, the one-year forward dollar/euro exchange rate is mispriced, because it doesn’t refl ect the interest rate diff erentials between the United States and Europe.
A . Calculate the amount of the current forward exchange discount or premium.
B . Calculate the value that the forward rate would need to be in order to keep riskless arbitrage from occurring.
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Related Book For 
Fixed Income Analysis
ISBN: 9788126563128
3rd Edition
Authors: Barbara S. Petitt, Jerald E. Pinto, Wendy L. Pirie, Bob Kopprasch
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