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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13-03-2020
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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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yahayadanjuma55 yahayadanjuma55 · Answer 1 · 2020-03-17T03:22:06+01:00

Answer:

Explanation:

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.