FRM Part I · FRM Exam Part I · Foreign Exchange Markets
The spot rate is USD 1.2000/EUR. The USD interest rate is 4% and the EUR rate is 2%, both continuously compounded. What is the no-arbitrage one-year EUR futures price (USD/EUR), to four decimals?
The one-year futures price is about 1.2242 USD per EUR. Under covered interest parity the futures price equals spot times e raised to the domestic minus foreign rate times time, so 1.2000 times e^0.02 gives 1.2242, reflecting the higher USD interest rate.
- A1.2242Correct
- B1.2000
- C1.2485
- D1.1764
Explanation
F = S e^{(rd - rf)T} = 1.2000 × e^{0.02} = 1.2000 × 1.020201 = 1.2242. Using e^{0.06} (adding the rates) gives 1.2485. Reversing the differential gives 1.1764.
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