Answer: 1.1523

The correct answer is D, which represents the 2-year forward USD per EUR 1 exchange rate calculated using the interest rate parity equation. The formula for the forward rate, \( F_t \), is given by: \[ F = \frac{(1 + R_{USD})^T \times S}{(1 + R_{EUR})^T} \] Where: - \( S \) is the spot exchange rate (1.13 USD per EUR in this case). - \( R_{USD} \) is the USD risk-free rate (2.7% per year). - \( R_{EUR} \) is the EUR risk-free rate (1.7% per year). - \( T \) is the time to delivery, which is 2 years for this question. Substituting the given values into the formula: \[ F = \frac{(1 + 0.027)^2 \times 1.13}{(1 + 0.017)^2} \] \[ F = \frac{(1.027)^2 \times 1.13}{(1.017)^2} \] \[ F = \frac{1.054729 \times 1.13}{1.034246} \] \[ F = \frac{1.19554497}{1.034246} \] \[ F \approx 1.1523 \] This calculation shows that the 2-year forward exchange rate is approximately 1.1523, which confirms that option D is the correct answer. The other options (A, B, and C) represent different scenarios or incorrect calculations of the forward rate, such as using switched rates or incorrect time periods.

Author: LeetQuiz Editorial Team