Suppose that the risk-free rates in the United States and in the United Kingdom are 6% and 4%, respectively. The spot exchange rate between the dollar and the pound is $1.60/BP. What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities, ignoring transactions costs.
A) $1.60/BP
B) $1.70/BP
C) $1.66/BP
D) $1.63/BP
E) $1.57/BP

Question

Quizplus · Accepted Answer

The futures price can be calculated using the interest rate parity formula: F = S * (1 + r_d) / (1 + r_f), where F is the futures price, S is the spot rate, r_d is the domestic interest rate, and r_f is the foreign interest rate. Plugging in the values: F = 1.60 * (1 + 0.06) / (1 + 0.04) = 1.63.

Suppose That the Risk-Free Rates in the United States and in the United