Given that annual deposit rates for Dollars and Euros are 6% and 4% respectively for the next 5 years. If the current spot rate of the Euro is $1.4015, obtain the implied rate for the Euro five years from now if International Fisher Equation holds exactly.

a. $1.5415

b. $1.2742

c. $1.4284

d. $1.3750

e. None of the above.

The correct answer is (a) $1.5415

Explanation:

Solution

Given that:

Annual deposit rate for dollar = 6%

Annual deposit rate for Euro = 4%

n = 5 years

The present spot rate of Euro = $1,4015

The next step is to obtain the implied rate for the Euro.

Thus

Implied rate = $1,4015[ (1.06) / (1.04) ]^5

= $1,4015 * 1.019230769^5

=$1,4015 * 1.099923877

=$1.5415

Hence the implied rate for Euro 5 years from now is $1.5415