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If the EUR USD spot rate is 1.3300;the EUR 1 year interest rate is 4%p.a.;USD 1 year interest rate is 2% p.a.
The EUR USD 1 year forward rate will be?
USING IRP:
1.3300*(1.04/1.02) = 1.3560
But the answer says it must be calculated 1.3300*(1.02/1.04)
But I thought in interpreting the spot rates:
EUR USD 1.3300
The first currency must be EUR and the second USD? i.e we are expressing the first currency EUR in terms of 1 of the second.Is that not so?I think it depends on who the investor is. If the investor is European then the answer would be correct but if the investor is from the US then your answer is correct. I’m not 100% on this one but I’m pretty sure that’s how it works ; )
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the correct answer is 1.3300*(1.02/1.04) , becoz its the interest rate in country of base currency to be in the denominator and of variable currency in numerator. here base currency is EUR and so its interest rate should be in the denominator i.e 1.04
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