What is the forward premium-discount implied by CIRP

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Why might it be hard to quantify currency risk in a target zone system or a pegged exchange rate system? CIRP (5p) Question 5 (1.5p): You are the CEO of Fruity Computers Products, and hold 100B EUR of as-yet untaxed profits in Europe. Today Congress announced (after market close) that in 20 days, they would open a one month window for US firms to repatriate cash and “invest in America.” As a reward, the tax rate will be halved. You are obviously worried about exchange risk, so you decide to hedge the exchange risk with a forward. Assume that the 30 day US interest is 0.25%, the Euro 30 day interest rate is 0.45%, and the EURUSD spot rate is 1.2400. What is the lowest forward rate F_EURUSD (out to four digits, round at the last calculation) you expect/are willing to pay? At that rate, how many (pre-tax) dollars will you have? What is the forward premium/discount implied by CIRP? (In percentages, out to four digits.)

Reference no: EM131983808

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