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

the six-month forward rate is 0.6869

Step-by-step explanation:

Spot rate: 0.7

Domestic interest rate: 5%

Foreign interest rate: 7%

Forward rate = spot rate * (1+ Domestic interest rate)/ (1 + Foreign interest rate)

= 0.7 * (1 + 5%)/ (1 + 7%)

= 0.6869