Suppose that the one-year U.S.interest rate is 9% and the one-year U.K.interest rate is 6%.If the current spot rate is $1.80 per pound,what must the one-year forward rate $/pound be according to the approximate covered interest parity?

Question

Quizplus · Accepted Answer

The approximate covered interest parity formula is F ≈ S * (1 + i_domestic) / (1 + i_foreign), where F is the forward rate, S is the spot rate, i_domestic is the domestic interest rate, and i_foreign is the foreign interest rate. Plugging in the given values: F ≈ 1.80 * (1 + 0.09) / (1 + 0.06) = 1.80 * 1.09 / 1.06 ≈ 1.854.

Suppose That the One-Year U