Suppose that the risk-free rates in the United States and in the United Kingdom are 5% and 4%,respectively.The spot exchange rate between the dollar and the pound is $1.80/BP.What should the futures price of the pound for a one-year contract be to prevent arbitrage opportunities,ignoring transactions costs?
A)$1.62/BP
B)$1.72/BP
C)$1.82/BP
D)$1.92/BP
E)none of the above

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. Substituting the given values: F = 1.80 * (1 + 0.05)/(1 + 0.04) = 1.80 * 1.05/1.04 = 1.82.

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