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Question 3b

PZK Co, whose home currency is the dollar, trades regularly with customers in a number of different countries. The company expects to receive €1,200,000 in six months’ time from a foreign customer. Current exchange rates in the home country of PZK Co are as follows:
Spot exchange rate: 4·1780–4·2080 euros per $
Six-month forward exchange rate: 4·2302–4·2606 euros per $
Twelve-month forward exchange rate: 4·2825–4·3132 euros per $

Required:
(b) If the interest rate in the home country of PZK Co is 4% per year, calculate the annual interest rate in the foreign customer’s country implied by the spot exchange rate and the twelve-month forward exchange rate. (2 marks)