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Q 2 . FX Rates and Interest Rates Your boss tells you she needs to know the six - month ( 6 - month )
Q FX Rates and Interest Rates
Your boss tells you she needs to know the sixmonth month euro interest rateright away. You go to the Bloomberg... it is down. You go to the Internet to find "euro" on Yahool Finance... the company's network is down. You have thrown away your copy of the day's National Post. The company's subscription to The Wall Street Journal and Financial Times has lapsed. Remember Murphy's law.
Fortunately, your company had a transaction in curo today, and your company's treasury department has obtained quotes of the spot and sixmonth forward rates from the bank as shown below. Well there is hope. Your colleague there could also find the sixmonth Eurodollar interest rate annualized simple interest below. You remember that one of your professors back in BSchool insisted that the Eurocurrency money markets and the foreign exchange markets are quite efficientat least for the major currenciesso that an arbitrage relation can be expected to hold across them. Armed with this knowledge, you quickly estimate the euro interest rate annualized simple interest for your boss. What is your estimate? Be sure to prorate the interest rates for the relevant period in your calculation. You, of course, know that the above "sixmonth Eurodollar interest rate" is the annualized rate for a sixmonth transaction, just as the year mortgage rate on your future home loan is the yearly rate that you will pay over the next years.
tableSpot rate lonEuro interest rate annualmonth forward rate lon$ interest rate annual
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