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Question 1.4. The spot exchange rate EUR/CHF is CHF 1.20. Interest rates are flat at 2.0% in the Eurozone (EUR) and 5.0% in Switzerland (CHF). According to interest rate parity (IRP), what should be the 12-month EUR/CHF forward exchange rate if we assume annual (discrete) compounding? | Financial Risk Manager Part 1 Quiz - LeetQuiz

Explanation:

For discrete-compounding interest rate parity:

F = S \times \frac{(1+r_{CHF})}{(1+r_{EUR})}

Given:

$S = 1.20$
$r_{CHF} = 5.0\%$
$r_{EUR} = 2.0\%$

F = 1.20 \times \frac{1.05}{1.02} \approx 1.2353

Rounded, the 12-month forward rate is EUR/CHF 1.24, so the correct answer is C.

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Question 1.4. The spot exchange rate EUR/CHF is CHF 1.20. Interest rates are flat at 2.0% in the Eurozone (EUR) and 5.0% in Switzerland (CHF). According to interest rate parity (IRP), what should be the 12-month EUR/CHF forward exchange rate if we assume annual (discrete) compounding?

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