During January 2005 an Italian investor investing in the Ita

During January 2005, an Italian investor investing in the Italian stock market earned a return of 1.47%. During the same month, an American investor investing in the Italian stock market earned a return of –2.358%. The U.S. dollar-Euro exchange rate at the end of January 2005 was 1.3035 $/€. What was the U.S. dollar-Euro exchange rate ($/€) at the end of December 2004?

Solution

F = S * ((1 + if) / (1 + id)) 1.3035 = S x (1+1.47%) / (1 - 2.358%) S = U.S. dollar-Euro exchange rate ($/€) = $1.25