Answer:
The 1 year forward rate with no arbitrage would be $1.03/ €
Explanation:
GIVEN INFORMATION -
Spot exchange rate ( S ) - $1.0500/€
US interest rate ( u ) = 3%
Euro zone interest rate ( e ) = 5%
For calculating the forward rate ( F ) we can use the following formula -
( 1 + u ) = F / S ( 1 + e )
( 1 + 3% ) = F / 1.0500 ( 1 + 5% )
1.03 = F / 1.0500 x 1.05
F = 1.03 x 1.0500 / 1.05
= 1.0815 / 1.05
= 1.03
Therefore the forward rate is $1.03/ €.
