The direct spot exchange rate for British pounds is 1.4329. The 180 day risk-free rates in the U.S. and Britain are 4.5% and 5.2%, respectively. What is the direct forward exchange rate?

Question

Quizplus · Accepted Answer

The correct answer is A because the direct forward exchange rate is calculated as the spot exchange rate multiplied by the forward premium or discount. The forward premium or discount is calculated as the difference between the domestic and foreign risk-free rates multiplied by the number of days in the forward contract divided by 360. In this case, the forward premium is (5.2% - 4.5%) * 180 / 360 = 0.27%. Therefore, the direct forward exchange rate is 1.4329 * (1 + 0.27%) = 1.4281.

The Direct Spot Exchange Rate for British Pounds Is 1