The one-year forward exchange rate for the British Pound is $1.80/Pound. If the one-year Australian interest rate is 4.5% and the one-year British interest rate is 6%, compute the implied spot exchange rate in $/Pound.

Question

Quizplus · Accepted Answer

Using interest rate parity:

(1 + 0.045) / (1 + 0.06) = Forward Rate / Spot Rate

1.045/1.06 = $1.80 / Spot Rate

Spot Rate = $1.80 x 1.06 / 1.045 = $1.83/Pound.

Therefore, the answer is C) 1.83.

The One-Year Forward Exchange Rate for the British Pound Is