ACCA Strategic Professional · Advanced Financial Management · International investment and financing decisions
Spot is EUR 0.9000 per USD. The one-year interest rate is 3% in the eurozone and 5% in the United States. Using interest rate parity, what is the one-year forward rate (EUR per USD)?
The one-year forward rate is EUR 0.8829 per USD. Interest rate parity multiplies spot by the euro interest factor divided by the dollar interest factor, 1.03 over 1.05, so the higher-interest USD trades at a forward discount.
- A0.8829Correct
- B0.9175
- C0.9000
- D0.8918
Explanation
Forward = 0.9000 x 1.03/1.05 = 0.9000 x 0.980952 = 0.8829. Option 0.9175 inverts the ratio. The USD has the higher interest rate, so it trades at a forward discount, meaning fewer euros per USD.
Did you get it right without looking?
One question tells you little. A timed set on International investment and financing decisions shows your real accuracy, how long you take and where you lose marks.
More International investment and financing decisions questions
- A UK company is appraising a project in Brazil. Cash flows are forecast in Brazilian reais (BRL) and converted using forecast spot rates. Wh…
- The spot rate is USD 1.2500 per GBP. Expected annual inflation is 4% in the United States and 2% in the United Kingdom. Using purchasing pow…
- Brant Co has a foreign project with an initial outlay of $1,000,000 and expected after-tax cash flows of $600,000 a year for 2 years, discou…
- Kestrel plc is evaluating an overseas project. Base-case NPV, discounted at the ungeared cost of equity, is $2.40 million. Issue costs on th…
- When assessing country risk before a foreign direct investment, which approach adjusts the project's cash flows for specific political event…
- Kestrel Inc, a US company, has a project in Poland. Its US dollar discount rate is 9%. Expected inflation is 5% in the US and 3% in Poland (…