FRM Part I · FRM Exam Part I · Foreign Exchange Markets
The spot EUR/USD rate is 1.0800 USD per EUR. The one-year USD interest rate is 5.00% and the one-year EUR interest rate is 3.00%, both annually compounded. Under covered interest rate parity, what is the one-year forward EUR/USD rate?
Covered interest parity gives the forward as spot times the ratio of domestic to foreign gross interest rates. With spot 1.0800, USD at 5% and EUR at 3%, the forward is about 1.1010, so the closest choice is 1.1000, reflecting the higher USD rate.
- A1.0594
- B1.0800
- C1.1000Correct
- D1.1124
Explanation
F = S × (1+r_USD)/(1+r_EUR) = 1.0800 × 1.05/1.03 = 1.0800 × 1.019417 = 1.1010 (approx. 1.1010). Rounded, this is closest to 1.1000? Check: 1.0800×1.019417=1.10097, so the nearest option is 1.1000. The 1.0594 option inverts the ratio, and 1.1124 uses simple rate difference incorrectly.
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