annualized interest rates in the U.S. and France on January 1, 1991 are 9% and 13%, respectively, and the spot value of the franc is $.1109, then at what 180?day forward rate will interest rate parity hold?

Question

Quizplus · Accepted Answer

Interest rate parity implies that the forward exchange rate should reflect the interest rate differential between two currencies. According to the information given, the interest rate differential is 4% in favor of France (13%-9%), meaning that the franc is expected to appreciate by 4% over the next 180 days. Therefore, the forward rate should be calculated as follows:

Forward rate = spot rate x (1 + franc interest rate / dollar interest rate)^(number of days / 360)

Forward rate = $0.1109 x (1 + 0.13/0.09)^(180/360)

Forward rate = $0.1088

Therefore, the correct answer is C.

Annualized Interest Rates in the U