Suppose the exchange rate between the U.S. dollar and the British pound is $1.50 = £1.00. If the UK interest rate is 6 percent per year, what is the adjusted price of the British pound when valuing an option to buy sterling with an expiration of one year?
A)$1.9050
B)$1.4151
C)$0.7067
D)$1.5900

Question

Quizplus · Accepted Answer

To calculate the adjusted price of the pound, we need to use the interest rate parity formula:

Forward rate / Spot rate = (1 + UK interest rate) / (1 + US interest rate)

Assuming the US interest rate is 2 percent per year, we have:

Forward rate / 1.50 = (1 + 0.06) / (1 + 0.02)
Forward rate = 1.4151

Therefore, the adjusted price of the pound is $1.4151. Answer choice B is the correct answer.

Suppose the Exchange Rate Between the U