Assume that the current exchange rate between U.K.pound and the U.S.dollar is 2 (E = 2.0).If interest parity holds,and the U.S.interest rate is 6% while the U.K.interest rate is 8%,the expected exchange rate in one year is
A)1)98.
B)1)99.
C)2)01.
D)2)02.
E) 2.04.

Question

Quizplus · Accepted Answer

According to interest parity, the expected exchange rate in one year can be calculated using the following formula:

Expected exchange rate = current exchange rate x (1 + foreign interest rate) / (1 + domestic interest rate)

Plugging in the given values, we get:

Expected exchange rate = 2 x (1 + 0.08) / (1 + 0.06) = 2.01

Therefore, the best choice is C) 2.01.

Assume That the Current Exchange Rate Between U