Question

An exchange rate is 0.7000 and the six- month domestic and foreign risk- free interest rates are 5% and 7% (both expressed with continuous compounding). What is the six- month forward rate

Answer 1

Answer:

0.693

Explanation:

Given that

Exchange rate = 0.7

Interest Rates = 5% and 7%

The calculation of six-month forward rate is shown below :-

= Spot Rate x e^ (Domestic Rate - Foreign Rate) x Domestic Rate

= 0.7 x e^ ((0.05 - 0.07) x 0.05)

= 0.7 x e^ -0.001

= 0.7 x 0.99

= 0.693

Hence, the six-month forward rate is 0.693. we simply find the six moth rate by applying the formula.