Neuberger Interview Question

How do interest rates influence the forward price?

Interview Answer

Anonymous

Apr 20, 2015

Explain what a forward price is and then detail how would someone be providing that, i.e. the forward price is the price of an asset set today for a delivery some time in the future. If I were to promise you that I'll deliver 100 USD in 3 mths time, I'll have borrow sterling in order to buy 100-x USD today (pay sterling for it at today's spot), deposit it for 3mths at the 3mth dollar rate and finally deliver you 100 USD. I choose x so that when the interest is added the result will be 100USD. You will pay me today's spot plus the interest rate differential between USD and GBP.

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