Use the information for the question(s)below. The current spot exchange rate, S, is $1.8862/£. Suppose that the yield curve in both countries is flat. The risk-free rate on dollars, r $ , is 5.35% and the risk-free interest rate on pounds, r £ , is 4.80%. -Using the covered interest parity condition, the calculated one-year forward rate F₁is closest to:

Question

Quizplus · Accepted Answer

According to the covered interest parity condition, (1+ r_$) = (1+r_£) * (F/S) Plugging in the numbers, we get: (1+0.0535) = (1+0.0480) * (F/1.8862) F = 1.8961/£ Therefore, the best choice is A) $1.8961/£.

Use the Information for the Question(s)below