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The current spot exchange rate between sterling and the euro is €1.4415 = £1. The sterling
annual interest rate is 5.75% pa and the euro annual interest rate is 4.75% pa.
What should the three month €/£ forward rate be (to four decimal places)?
€/£Using interest rate parity theory , i’m getting the answer 1.4451
The answer given in the kit is 1.4739
Can you explain this answer?The 3 month rates are 5.75/4 = 1.4375%, and 4.75/4 = 1.1875%
Therefore the 3 months forward rate is 1.011875/1.014375 x 1.4415 = 1.4379
It seems that either you have mistyped the answer from your book, or there is a typing error in your book.
(Also, since the euro interest rate is lower than the sterling rate, the forward rate must be lower than the spot rate.)
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