The replication method identifies the price of a USD/GBP forward rate as a function of
A)The expected future USD/GBP exchange rate,the GBP interest rates,and the USD interest rates
B)The spot USD/GBP exchange rate and the volatility of the spot USD/GBP exchange rate
C)The spot USD/GBP exchange rate,the GBP interest rates,and the USD interest rates
D)Only the spot USD/GBP exchange rate

Question

Quizplus · Accepted Answer

The replication method for pricing a USD/GBP forward rate primarily involves the current (spot) USD/GBP exchange rate, the interest rates of both currencies involved (GBP and USD interest rates). These factors are used to calculate the forward rate based on the interest rate parity, which states that the forward price is determined by the spot price adjusted for the interest rate differential between the two currencies.

The Replication Method Identifies the Price of a USD/GBP Forward