If the U.S. dollar interest rate is 4 percent and the peso interest rate is 7 percent, what is the likely one-year forward rate if the spot dollar-peso rate is peso 11/$US?
A)11.54
B)11.32
C)10.68
D)10.23

Question

Quizplus · Accepted Answer

The formula for one-year forward exchange rate is:
Forward rate = Spot rate x ((1 + domestic interest rate) / (1 + foreign interest rate))^time
Here, the domestic currency is peso and the foreign currency is U.S. dollar. We are given:
Spot rate = peso 11/$US
Domestic interest rate = 7%
Foreign interest rate = 4%
Time = 1 year
Forward rate = peso 11/$US x ((1 + 0.07) / (1 + 0.04))^1 = peso 11.32/$US. Therefore, the likely one-year forward rate is 11.32.

If the US Dollar Interest Rate Is 4 Percent and the Peso