The current direct exchange rate is $1.2963/ €. The anticipated annual inflation rate is 2% in the United States and 5% in the Euro zone. What is the forward exchange rate?
A) $1.2117/€
B) $1.2593/€
C) $1.3344/€
D) $1.3776/€
Answer: B
Explanation: B) The forward exchange rate is: Spot rate × (1 + foreign rate)/(1 + domestic rate)
= $1.2963/ € × = $1.2593/€
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