Suppose the spot and six-month forward rates on the South Korean won are SKW 1.3

Question

Suppose the spot and six-month forward rates on the South Korean won are SKW 1.304.84 and SKW 1,315.10, respectively. The annual risk-free rate in the United States is 5 percent, and the annual risk-free rate in South Korea is 8 percent. (Enter your answer as directed, but do not round intermediate calculations.) Required: What must the six-month forward rate be to prevent arbitrage? (Do not include the South Korean won sign (SKW). Round your answer to 4 decimal places (e.g., 32.1616).) Forward rate SKW

Explanation / Answer

Using the formula for Interest rate parity

Forward rate = Spot rate * e[(risk free rate of South Korea- risk free rate of US) * time to maturity]

= 1,304.84 * e[(8% - 5%) * 6 / 12]

   = 1,324.5601

The six-month forward rate to prevent arbitrage is SKW 1,324.5601

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