One-year interest rates are currently 2.50% in the United States and 3.70% in Great Britain. The current spot rate between the pound and dollar is $1.9000/£. What is the expected spot rate in one year if the international Fisher effect holds?

Question

Quizplus · Accepted Answer

The International Fisher Effect suggests that currencies with higher interest rates will depreciate. Since the UK has a higher interest rate, the pound is expected to depreciate. The expected spot rate is calculated as: $1.9000 * (1 + 0.025) / (1 + 0.037) = $1.8780/£.

One-Year Interest Rates Are Currently 2