Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.87

Question

Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.87 and Kr 6.02, respectively. The annual risk-free rate in the United States is 3.67 percent, and the annual risk-free rate in Norway is 5.37 percent.

Using the approximation, the six-month forward rate on the Norwegian krone would have to be Kr/$ _________ to prevent arbitrage. (Do not round intermediate calculations. 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 5.87 and Kr 6.02, respectively. The annual risk-free rate in the United States is 3.67 percent, and the annual risk-free rate in Norway is 5.37 percent.

Explanation / Answer

using interest rate parity theory, six-month forward rate on the Norwegian krone is calculated below:

Forward rate = Spot rate × (1 + US rate) / (1 + Norwegian rate)

= 5.87 × (1 + 3.67% / 2) / (1 + 5.37% / 2)

= 5.87 × (1.1835 / 1.2685)

= 5.87 × 0.9917

= Kr5.8214.per Dollar.

Using the approximation, the six-month forward rate on the Norwegian krone would have to be Kr5.8214 per dollar to prevent arbitrage

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