Assume the exchange rate is GBP 1.35/USD, the US risk-free rate is 7.0 percent, and the UK risk-free rate is 3.0 percent. What is the implied one-year forward rate?
A) GBP 1.40/USD
B) GBP 1.35/USD
C) GBP 1.30/USD
D) GBP 1.25/USD
E) GBP 1.20/USD

Question

Quizplus · Accepted Answer

The implied forward rate can be calculated using the formula: Forward Rate = Spot Rate * (1 + Domestic Interest Rate) / (1 + Foreign Interest Rate). Here, it is 1.35 * (1 + 0.07) / (1 + 0.03) = 1.30.

Assume the Exchange Rate Is GBP 1