Chapter 6

Separated by thousands of nautical miles and time zones, money and foreign exchange markets in both Frankfurt and New York are very efficient. The following information is available from the respective areas:

Frankfurt

New York

Spot exchange rate ($/)

1.3264

1.3264

One-year Treasury bill rate

3.9000%

4.5000%

Expected inflation rate

Unknown

1.2500%

Use 4 digits beyond the decimal point for currency rates and exchange rates

Calculate the following:

The expected rate of inflation in Europe is %

1-year forward rate is $/)