Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.84

Question

Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.84 and Kr 5.99, respectively. The annual risk-free rate in the United States is 3.64 percent, and the annual risk-free rate in Norway is 5.34 percent.

The six-month forward rate on the Norwegian krone would have to be Kr/$  to prevent arbitrage. (Round your answer to 4 decimal places. (e.g., 32.1616))

Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.84 and Kr 5.99, respectively. The annual risk-free rate in the United States is 3.64 percent, and the annual risk-free rate in Norway is 5.34 percent.

Explanation / Answer

Solution-

We use the interest rate parity condition, so:

F = S (1+id) / (1+if)

F = 5.84 (1+5.34%) / (1+3.64%)

F = 5.94%

The six-month forward rate on the Norwegian krone would have to be Kr/$ 5.94 to prevent arbitrage.

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