Suppose that the 12-month interest rates for the United States and the United Kingdom are 7% and 6% respectively,and E = 2.10 $/£. Given this information,what is the expected exchange rate change over the year?
A)1%
B)4.2%
C)2.1%
D)2.0%

Question

Quizplus · Accepted Answer

The expected exchange rate change can be calculated using the Interest Rate Parity (IRP) formula, which suggests that the difference in interest rates between two countries will equal the expected change in exchange rates between those countries' currencies. Here, the difference in interest rates is 1% (7% - 6%), indicating an expected exchange rate change of 1%.

Suppose That the 12-Month Interest Rates for the United States