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26 June, 19:15

An exchange rate is 0.7000 and the six - month domestic and foreign risk - free interest rates are 5% and 7% (both expressed with continuous compounding). What is the six - month forward rate

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  1. 26 June, 19:26
    0
    0.693

    Explanation:

    Given that

    Exchange rate = 0.7

    Interest Rates = 5% and 7%

    The calculation of six-month forward rate is shown below : -

    = Spot Rate x e^ (Domestic Rate - Foreign Rate) x Domestic Rate

    = 0.7 x e^ ((0.05 - 0.07) x 0.05)

    = 0.7 x e^ - 0.001

    = 0.7 x 0.99

    = 0.693

    Hence, the six-month forward rate is 0.693. we simply find the six moth rate by applying the formula.
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