What would be a forward exchange rate?
Assume that the spot exchange rate for EUR/USD is 1.15 (i.e., One Euro buys 1.15 U.S. dollars). A U.S. bank pays 5.5 percent annual interest rate for a dollar deposit and a German bank pays 3.1 percent annual interest rate for a Euro deposit. Both rates are compounded annually. If the interest-rate parity theory holds, what will be the forward exchange rate for EUR/USD one year from now?
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