# Quiz 6: Interest Rate Parity

The value of the prize is being provided and it is mentioned the method of distribution is being provided in order to determine the present value of the prize amount. The amount of prize won is \$10,000,000 The amount to be paid per annum is \$333,333.33 The number of years is 30 In this case, excel can be used for determining the present value of the prize amount. Below excel discloses the data that are entered for the calculation purposes. Enter in excel B4 "=PV(B1,B2,-B3)" to determine the present value of the prize. Below excel discloses the entered formula. Present value of the prize: The Present value of the prize is \$3,752,594.41
5-year interest rate on both the dollar and euro denominated pure discount bonds are provided in order to determine the forward exchange rate in order to eliminate the covered interest rate arbitrage. The forward rate for 5-years can be determined using the given interest rate of U.S. dollar and euro along with the spot exchange rate in order to avoid covered interest rate arbitrage. Following is the formula used to determine the forward exchange rate: Where, On substituting the variables in the above equation: Thus, the forward exchange should be in order to avoid covered interest rate arbitrage.