FP of Currency

I can’t seem to figure out an answer from a schweser mock. I’ve changed the names etc to not infringe on their material. Exam 1 AM q 47

1 Euro = 1.10, RFR=0.03, Euro RFR= 0.04. 1 year forward price is?

The answer is that the euro depreciates to below $1.10. Why is that? Shouldn’t the higher RFR cause the currency to appreciate? Or is it somehow different for forwards?


for interest rate parity to hold the Euro will deprecitate to make up for the higer interest rate relative to the U.S. Dollar

Forward price = 1.089=1.1*1.03/1.04 which means the Euro has depreciated vs the USD.

Thank you. I think I was confusing RFR with real rate. If the RFR is higher in one country, it’s currency must be losing value because of inflation?