Suppose that the one-year U.S.interest rate is 7% and the one-year Swedish interest rate is 10%.If the current spot rate is 6.80 Swedish krona per dollar,what must the one-year forward rate SKr/$ be according to the approximate covered interest parity?

Question

Quizplus · Accepted Answer

According to Covered Interest Parity (CIP), the difference between the interest rates of two currencies should be equal to the difference between their forward and spot exchange rates. Let F be the one-year forward rate, then we can use the following formula:
(1 + 0.07) = (1 + 0.10) × (F/6.80)
Solving for F, we get: F = 7.004
Therefore, the one-year forward rate SKr/$ must be 7.004 according to the approximate covered interest parity. Option C is the correct answer.

Suppose That the One-Year U