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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?
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8456212 soln.docx

As per interest rate parity we know:
Spot = 1 + US $
1+ Euro (in terms of $/Euro) ………………………………….. eqn (1) Situation 1 : Before Initially since the 1 month interest...

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