hard · CFA Level I Economics
Pinion Logistics is evaluating a one-year expansion into a neighboring market. The domestic currency (DC) is the price currency, and the foreign currency (FC) is the base currency. The spot exchange rate DC/FC is 1.2500. One-year risk-free rates are 5.0% in the domestic market and 2.0% in the foreign market. The firm is considering hedging its exposure using a forward contract.
Question: Under the principle of covered interest rate parity (CIP), the one-year forward rate (DC/FC) is closest to:
- 1.2875
- 1.2868
- 1.2143
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