Multiple choice 26. The spot €:$ is equal to 1.1795. The one-year interest rates

Question

Multiple choice

26. The spot €:$ is equal to 1.1795. The one-year interest rates on the Eurocurrency market are 4% in euros and 5% in U.S. dollars. What is the one-year forward exchange rate?

A. 1.1683

B. 1.1908

C. 1.1895

D. 1.1913

27. The spot €:$ is equal to 1.1795. The one-year interest rates on the Eurocurrency market are 4% in euros and 5% in U.S. dollars. What is the three-month forward exchange rate?

A. 1.1908

B. 1.1683

C. 1.1824

D. 1.1766

28. If the exchange rate value of the euro goes from U.S. $1.15 to U.S. $1.05, then:

A. The euro has appreciated, and Europeans will find U.S. goods cheaper.

B. The euro has appreciated, and Europeans will find U.S. goods more expensive.

C. The euro has depreciated, and Europeans will find U.S. goods more expensive.

D. The euro has depreciated, and Europeans will find U.S. goods cheaper

Explanation / Answer

26. Forward rate = Spot rate * (1 + interest rate in euros) / (1 + interest rate in dollars)

= 1.1795 * 1.04 / 1.05

= 1.1683 which is option (A)

27. Forward rate = Spot rate * (1 + 3-month interest rate in euros) / (1 + 3-month interest rate in dollars)

= 1.1795 * (1 + 4%/4) / (1 + 5%/4)

= 1.1766 which is option (D)

28. A. The euro has appreciated, and Europeans will find U.S. goods cheaper.

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