Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.83

Question

Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.83 and Kr 5.98, respectively. The annual risk-free rate in the United States is 3.63 percent, and the annual risk-free rate in Norway is 5.33 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))

References

Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.83 and Kr 5.98, respectively. The annual risk-free rate in the United States is 3.63 percent, and the annual risk-free rate in Norway is 5.33 percent.

Explanation / Answer

Forward Rate = Spot Rate x [(1 + Norway rate) / (1 + US rate)]^n

= 5.83 x (1.0533 / 1.0363)^0.5

= 5.8776 kr/$

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