Question

Given that annual deposit rates for Dollars and Euros are 6% and 4% respectively for the next 5 years. If the current spot rate of the Euro is $1.4015, obtain the implied rate for the Euro five years from now if International Fisher Equation holds exactly.

a. $1.5415
b. $1.2742
c. $1.4284
d. $1.3750
e. None of the above.

Answer 1

The correct answer is (a) $1.5415

Step-by-step explanation:

Solution

Given that:

Annual deposit rate for dollar =6%

Annual deposit rate for Euro = 4%

n = 5 years

The present spot rate of Euro =$1,4015

The next step is to obtain the implied rate for the Euro.

Thus

Implied rate = $1,4015[(1.06)/(1.04)]^5

= $1,4015 * 1.019230769^5

=$1,4015* 1.099923877

=$1.5415

Hence the implied rate for Euro 5 years from now is $1.5415