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

To calculate the fair forward exchange rate, we need to use the interest rate parity formula:

Forward rate = Spot rate × (1 + foreign interest rate) / (1 + domestic interest rate)

Plugging in the numbers, we get:

Forward rate = 0.5491 × (1 + 0.04) / (1 + 0.03) = 0.5544 pounds per dollar

Therefore, the correct answer is D.

The Spot Rate on the British Pound Is 0