The risk-free interest rate in the US is 8% while the risk-free interest rate in the UK is 15%.If the 1-year futures price on the British pound is $2.40,the spot market value of the British pound today should be __________.

Question

Quizplus · Accepted Answer

We need to use the interest rate parity formula to find the spot rate.

F / S = (1 + rfc) / (1 + rfc)

where F is the futures price = $2.40, S is the spot price we're looking for, rfc is the US risk-free interest rate = 8%, and rfc is the UK risk-free interest rate = 15%.

Plugging in the values we get:

$2.40 / S = (1 + 0.08) / (1 + 0.15) 
$2.40 / S = 1.08 / 1.15 
$2.40 / S = 0.939 
S = $2.56

Therefore, the spot market value of the British pound today should be $2.56.

The Risk-Free Interest Rate in the US Is 8% While