Question
Derivatives forwards and exchange rates The current US$/Euro exchange rate is 1.4000 dollar per Euro. The 6-month forward exchange rate is 1.3950. The 6-month US$
Derivatives forwards and exchange rates
The current US$/Euro exchange rate is 1.4000 dollar per Euro. The 6-month forward exchange rate is 1.3950. The 6-month US$ interest rate is 1% per annum continuously compounded. Estimate the 6-month Euro interest rate.
I have the answer its below. My problem is I don't understand the natural log process and how to get R. Not sure where the 2 came from before the ln.
.Current USD/Euro rate is 1.4000 $/Euro.
6-month forward exchange rate is 1.395.
6-month USD interest rate is 1%
If the 6-month Euro interest rate is r, then
1.395 = 1.400e(0.01-r)x0.5
So 0.01 -r = 2ln(1.395/1.400) = -0.00716
Hence, r = 0.01716
The 6-month Euro interest rate is 1.716%
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