annualized interest rates on January 1, 1985 in the U.S. and France were 9% and 13%, respectively, and the spot value of the franc was $.1109, then at what 180?day forward rate would interest rate parity hold?
A) $.1070
B) $.1150
C) $.1088
D) $.1130

Question

Quizplus · Accepted Answer

To determine the 180-day forward rate, we use the interest rate parity formula:
(1 + US interest rate) / (1 + foreign interest rate) = Forward rate / Spot rate

Plugging in the given information:
(1 + 0.09) / (1 + 0.13) = Forward rate / 0.1109

Solving for the forward rate, we get:
Forward rate = 0.1088

Therefore, the correct answer is C) $.1088.

Annualized Interest Rates on January 1, 1985 in the U