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julsineya [31]
3 years ago
14

If the interest rate in the United Kingdom is 8 percent, the interest rate in the United States is 10 percent, the spot exchange

rate is $1.75/£1, and interest rate parity holds, what must be the one-year forward exchange rate?
Business
1 answer:
NISA [10]3 years ago
3 0

Answer:

The answer is $1.78 / £1

Explanation:

Solution

Given that

Interest rate of United kingdom = 8%

Interest rate of United States =10%

Spot exchange rate =$1.75£1

The next step is to find the one year forward rate of exchange

Thus

Forward Rate = S₀ * [ ( 1 + Rus) / ( 1 + RE) ]

=$ 1.75 * ( ( 1 + 10%) / ( 1 + 8%) )

$1.78

Therefore, the forward exchange rate is $ 1.78 / £1

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