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Question 6.5: A US importer of German cars wants to arrange a forward cont...

A US importer of German cars wants to arrange a forward contract to buy euros in half a year. The interest rates for investments in US dollars and euros are rUSD=4%r_{USD} = 4\% and rEUR=3%r_{EUR }= 3\%, respectively, the current exchange rate being 0.9834 euros to a dollar. What is the forward price of euros expressed in dollars (that is, the forward exchange rate)?

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The euro plays the role of the underlying asset with dividend yield 3%. Hence the forward price (the exchange rate) is

F(0,1/2)=0.9834e0.5(4%−3%)≅0.9883F(0, 1/2) = 0.9834e^{0.5(4\%−3\%)}≅ 0.9883

euros to a dollar.

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