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International Financial Management Forward Rate

1. Deriving the Forward Rate: Assume that annual interest rates in the U.S. are 4 percent, while interest rates in France are 6
percent.

a. According to IRP, what should the forward rate premium or discount of the euro be?

b. If the euro's spot rate is $1.10, what should the one-year forward rate of the euro be?

Solution Preview

a. F1/e0 = (1+rd)/(1+rf)

rd=4%

rf=6%

F1/e0=(1.04)/(1.06)= ...

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