Assume the exchange rate is GBP 1.35/USD, the US risk-free rate is 3.0 percent, and the UK risk-free rate is 3.0 percent. What is the implied one-year forward rate?
A) GBP 1.40/USD
B) GBP 1.35/USD
C) GBP 1.30/USD
D) GBP 1.25/USD
E) GBP 1.20/USD

Question

Quizplus · Accepted Answer

The formula for the one-year forward rate is:
Forward rate = spot rate * (1 + foreign risk-free rate) / (1 + domestic risk-free rate)
Therefore, the implied one-year forward rate is:
Forward rate = 1.35 * (1 + 0.03) / (1 + 0.03) = 1.35 GBP/USD
Therefore, the best choice is B as it is equal to the spot rate.

Assume the Exchange Rate Is GBP 1