Financial Risk Manager Part 1

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Explanation:

Using covered interest rate parity with continuous compounding:

\ln\left(\frac{F}{S}\right) = (r_{US} - r_{EUR})T

Given:

Compute:

\ln(1.35/1.40) = \ln(0.9642857) \approx -0.03637

\frac{-0.03637}{1.5} \approx -0.02424 = 0.01 - r_{EUR}

So:

r_{EUR} \approx 0.01 + 0.02424 = 0.03424 = 3.42\%

Thus the correct answer is D.

Bonus (discrete compounding):

\frac{F}{S} = \frac{(1+r_{US})^{1.5}}{(1+r_{EUR})^{1.5}}

Solving gives an implied Eurozone rate of about 3.47%, which is close to the continuous-compounding result.

Explanation:

Using covered interest rate parity with continuous compounding:

\ln\left(\frac{F}{S}\right) = (r_{US} - r_{EUR})T

Given:

Compute:

\ln(1.35/1.40) = \ln(0.9642857) \approx -0.03637

\frac{-0.03637}{1.5} \approx -0.02424 = 0.01 - r_{EUR}

So:

r_{EUR} \approx 0.01 + 0.02424 = 0.03424 = 3.42\%

Thus the correct answer is D.

Bonus (discrete compounding):

\frac{F}{S} = \frac{(1+r_{US})^{1.5}}{(1+r_{EUR})^{1.5}}

Solving gives an implied Eurozone rate of about 3.47%, which is close to the continuous-compounding result.

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MManit

Last updated: April 18, 2026 at 11:32

0.87%

33.3%

1.45%

33.3%

2.38%

11.1%

3.42%

22.2%