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This is another question on the forex. The debt finance will be provided by an immediate €6.5million loan notes. The interest rate on the loan notes is 8% per year with annual interest being payable in 2 installments in euros on a 6monthly basis €260000. What is the dollar cost in the forward market of hedging the first interest payment on loan notes?
The spot exchange €1.3050-€1.3112
6mnth forward €1.2876-€1.2902
My question is why do we take the €1.2876 and not 1.2902?
They will be buying Euros to make the interest payment and therefore the conversion is at the first (lower) rate.