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The continuously compounded Euro interest rate is 0 and the continuously compounded US dollar interest rate is 5%. The current market exchange rate between US dollar and Euro is 1.08 Dol- lar/Euro (one Euro can be exchanged for 1.08 dollars). An investor has just entered into a forward contract to purchase 1 million Euro in two years.
(a) Suppose one year later, the market exchange rate exchange rate between US dollar and Euro is 1.20 Dollars per Euro. Calculate the the no-arbitrage forward price of Euro under the assumption that the interest rate or Euro and US dollar remains the same (that is, 0% for Euro and 5% for US dollar).
(b) What is the market value of the investor’s 1M Euro forward contract (with the forward price of 1.08 Dollar per Euro)?
Please show all work. Hint use the equation below to solve: Forward rate = Spot rate($/€) * e^[(rus-reuro)*T]
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