Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.83

Question

Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.83 and Kr 5.98, respectively. The annual risk-free rate in the United States is 3.63 percent, and the annual risk-free rate in Norway is 5.33 percent.

The six-month forward rate on the Norwegian krone would have to be Kr/$  to prevent arbitrage. (Round your answer to 4 decimal places. (e.g., 32.1616))

Suppose the spot and six-month forward rates on the Norwegian krone are Kr 5.83 and Kr 5.98, respectively. The annual risk-free rate in the United States is 3.63 percent, and the annual risk-free rate in Norway is 5.33 percent.

Explanation / Answer

Forward rate = spot rate*(1+domestic rate ) / (1+foreign rate)

= 5.83*(1+5.33%/2) / (1+3.63%/2)

= 5.88

It should be Kr 5.88 to prevent arbitrage

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