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forward exchange rate

NNikita4y ago
Ques - Herd Co is based in a country whose currency is the dollar ($). The company expects to receive €1,500,000 in 6 months' time from Find Co, a foreign customer. The finance director of Herd Co is concerned that the euro (€) may depreciate against the dollar before the foreign customer makes payment and she is looking at hedging the receipt. Herd Co has in issue loan notes with a total nominal value of $4m which can be redeemed in 10 years' time. The interest paid on the loan notes is at a variable rate linked to LIBOR. The finance director of Herd Co believes that interest rates may increase in the near future. The spot exchange rate is €1.543 per $1. The domestic short-term interest rate is 2% per year, while the foreign short-term interest rate is 5% per year. a) What is the six-month forward exchange rate predicted by interest rate parity? Please help me in the above question , thanks in advance!
John MoffatJohn MoffatTutor4y ago#1
You use the interest rate parity formula that is provided on the formula sheet (the very last formula on the page). Because the question requires a 6 month forward rate you use the 6 monthly interest rates which are half of the annual interest rates given in the question. I do illustrate how to use the formula in my free lectures!
NNikita4y ago#2
okay got it , thanks :)
John MoffatJohn MoffatTutor4y ago#3
You are welcome :-)
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