Question: A U.S.-based Treasury risk manager is evaluating his EUR hedging program with the following information regarding the USD/EUR exchange rate and respective benchmark rates: Current

A U.S.-based Treasury risk manager is evaluating his EUR hedging program with the following information regarding the USD/EUR exchange rate and respective benchmark rates:

Current USD/EUR exchange rate: 1.08

Current USD 1-year risk-free interest rate: 0.45%

Current EUR 1-year risk-free interest rate: -0.30%

Calculate the one-year forward USD/EUR exchange rate and explain whether based upon the interest rate differential the EUR is expected to appreciate or depreciate (8 points)

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