Explanation:
Spot * (1 + rate_domestic)^T = Forward * (1 + rate_foreign)^T, and
Forward = Spot * (1 + rate_domestic)^T / (1 + rate_foreign)^T, and
Forward (EUR/CHF) = Spot (EUR/CHF) * (1 + CHF rate)^T / (1 + EUR)^T, and
Forward (EUR/CHF) = 1.20 * 1.05 / 1.02 = EUR/CHF 1.2353 ≈ 1.24
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Q-194.4. 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?
A
EUR/CHF 1.14
B
EUR/CHF 1.20
C
EUR/CHF 1.24
D
EUR/CHF 1.28
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