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19 August, 23:42

What is the forward premium on euros (the forward discount on USD) ? What is the difference between the interest rate on one-year USD deposits and that on one-year euro deposits (assuming no repayment risk) ?

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  1. 20 August, 00:11
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    In calculating the Interest parity condition is given as R$ = R€ + (Ee$/€ - E$/€) / E$/€where R$and R€ are the current interest rates on one-year dollar and euro deposits respectively, E$/€ is the spot exchange rate, and Ee$/€ is the one-year forward exchange rate. The interest rate difference between one-year dollar deposits and one-year euro deposits will be know when there is a difference between the dollar and euro because the interest difference must be equal to the forward premium on euro against dollars when covered interest parity holds.
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