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Q.2828 Calculate the current forward rate if you are given that the spot price of 1 unit of the underlying cash asset is 1.22, with a domestic free rate of 0.037 and τ = 1. The income flow rate y is 1.92%. (Assume continuous compounding.) | Financial Risk Manager Part 2 Quiz - LeetQuiz

Explanation:

Remember that the current forward rate is given by the equation:

F_t = S_t e^{-y_t e^{rt}}

We know that, $S_t = 1.22$ , $r = 0.037$ , $y = 0.0192$ and $\tau = 1$ .

Applying the formula:

F_t = 1.22 e^{-0.0192 \times 1} \times e^{0.037 \times 1} = 1.24

The forward rate to but one unit of the underlying cash asset is 1.24

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