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Given:

spot: USD/DKK 5.6531/ 5.6542

6 month-forward outright: USD/DKK 5.7781/ 5.7832

US (USD)

interest rates (investing, borrowing) 0.25%, 0.75%

Danish (DKK) interest rates (investing, borrowing) 1.25%, 1.75%

all interest rates given in annual nominal terms


a) calculate the theoretical forward rate implied by interest rate parity

b) show whether the forward is overvalued or undervalued

c) which currency should you borrow in and why ?

d) what is the percentage return from engaging in covered interest parity?

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