Explanation:

For a quote of USD per EUR, IRP is:

F = S e^{(r_{USD}-r_{EUR})T}

Solve for $r_{USD}$ :

r_{USD} = r_{EUR} + \frac{1}{T}\ln\left(\frac{F}{S}\right)

Given:

r_{USD} = 0.025 + \frac{1}{2}\ln\left(\frac{1.40}{1.46}\right) \approx 0.025 + \frac{1}{2}(-0.04197) \approx 0.0040

So the implied U.S. risk-free rate is approximately 0.40%, which is B.

Q-166.3. Assume the two-year riskfree interest rate in the Eurozone is 2.50% per annum with continuous compounding. The spot exchange rate between the Euro (EUR) and the US dollar (USD) is `$1.46` USD per EUR (i.e., 1.46 EUR/USD). The two-year forward exchange rate is `$1.40` USD per EUR (1.40 EUR/USD). According to interest rate parity (IRP), what is the implied two-year risk-free interest rate in the United States?

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MManit

Last updated: April 18, 2026 at 11:32

a) 0.00%

0.0%

b) 0.40%

100.0%

c) 0.80%

d) 1.20%

Financial Risk Manager Part 1