Financial Risk Manager Part 1

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Explanation:

According to the interest rate parity theorem, the forward exchange rate must be derived with the following equation:

F = \text{Spot Exchange Rate} \times \left(\frac{1 + R_{\text{AED}}}{1 + R_{\text{USD}}}\right)^T

= 3.33 \times \left(\frac{1.02}{1.04}\right)^1

= 3.26596

This gives a forward exchange rate of approximately 3.266, matching choice D.

Q.895 A foreign currency analyst based in Dubai is forecasting the forward exchange rate USD/AED. Currently, the USD/AED spot exchange rate is 3.33. Suppose that the interest rate in the United Arab Emirates is 2% and the interest rate in the U.S. is 4%, determine the 1-year forward exchange rate of USD/AED.

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Last updated: July 21, 2026 at 02:10

3.400

3.395

3.266