The spot rate on the British pound is 0.5491 per U.S.dollar,while the risk-free borrowing rates are 4% in Britain and 3% in the United States.What is the "fair" forward exchange rate?

Question

Quizplus · Accepted Answer

The fair forward exchange rate can be calculated using the formula: 
Forward exchange rate = spot exchange rate * (1 + domestic interest rate) / (1 + foreign interest rate) 
Plugging in the values: 
Forward exchange rate = 0.5491 * (1 + 0.04) / (1 + 0.03) = 0.5544 pounds per dollar. 
Therefore, the correct choice is D.

The Spot Rate on the British Pound Is 0