The spot rate for the British pound currently is $\le$.5086 per $1. The one-year forward rate is $\le$.4975 per $1. A risk-free asset in the U.S. is currently earning 4 %. If interest rate parity holds, what rate can you earn on a one-year risk-free British security?

Question

Quizplus · Accepted Answer

The correct answer is A because the interest rate parity formula is: F = S(1 + r_f)/(1 + r_d), where F is the forward rate, S is the spot rate, r_f is the foreign risk-free rate, and r_d is the domestic risk-free rate. Plugging in the given values, we get: 10.4975 = 10.5086(1 + r_f)/(1 + 0.04). Solving for r_f, we get: r_f = 0.0173, or 1.73%.

The Spot Rate for the British Pound Currently Is ≤\le≤ 5086 Per $1

The Spot Rate for the British Pound Currently Is $\le$ 5086 Per $1