This question has been answered by schoudhary on May 12, 2013. View Solution
dejiladipo posted a question May 12, 2013 at 3:35pm
Changes in the Forward Rate Assume that interest rate parity exists and will continue to exist. As of this morning, the 1- month interest rate in the United States was higher than the 1- month interest rate in the eurozone. Assume that as a result of the European Central Bank’s monetary policy this afternoon, the 1- month interest rate of the euro increased, and is now higher than the U. S. 1- month interest rate. The 1- month interest rate in the United States remained unchanged. Based on the information
a. Do you think the 1- month forward rate of the euro exhibited a discount or premium this morning? b. How did the forward premium changes this afternoon?
schoudhary answered the question May 12, 2013 at 5:04pm
PFA..  View Full Answer

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As per interest rate parity we know:
Forward
Spot

= 1 + US $
1+ Euro

(in terms of $/Euro)

.. eqn (1)

Situation 1 : Before Initially since the 1 month interest rate of $ is higher than the 1...