Explanation:
Using approximate formula: Forward Points ≈ (r_quote - r_base) × S × T × 10,000. So 172.00 ≈ (r_USD - r_EUR) × 1.1500 × 0.5 × 10,000 = (r_USD - r_EUR) × 5,750. Thus r_USD - r_EUR ≈ 172.00/5,750 ≈ 2.99% ≈ 3.0%. The forward premium on USD means USD rate is higher than EUR rate.
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Q-3 (22.17.3): The current spot exchange rate between the euro (EUR) and U.S. dollar (USD) is $1.1500 EURUSD. The six-month ( years) EURUSD forward quote in points is 172.00. According to covered interest rate parity, which of the following is true about the approximate per annum (aka, annualized) interest rate differential between the risk-free rates in the two countries?
A
The EUR interest rate is approximately 0.9% per annum higher than the USD rate
B
The EUR interest rate is approximately 1.4% per annum higher than the USD rate
C
The USD interest rate is approximately 3.0% per annum higher than the EUR rate
D
The USD interest rate is approximately 6.2% per annum higher than the EUR rate
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