The spot exchange rate for the British pound is 0.5 pounds/dollar.The one-year interest rate in the United States is 4% and the one-year interest rate in Britain is 5%.Based on these rates,what one-year forward exchange rate is consistent with the absence of arbitrage?

Question

Quizplus · Accepted Answer

The forward exchange rate can be calculated using the interest rate parity formula: Forward Rate = Spot Rate * (1 + Interest Rate of Domestic Country) / (1 + Interest Rate of Foreign Country). Here, Forward Rate = 0.5 * (1 + 0.04) / (1 + 0.05) = 0.5 * 1.04 / 1.05 = 0.505.

The Spot Exchange Rate for the British Pound Is 0