The spot exchange rate for the British pound is 0.5 pounds/dollar. The one-year interest rate in the United States is 4% and the one-year interest rate in Britain is 5%. Based on these rates, what one-year forward exchange rate is consistent with the absence of arbitrage?

Question

Quizplus · Accepted Answer

D) Forward rate = Spot rate_£/$ × ((1 + r_£)^T/ (1 + r_$)^T) Forward rate = £0.5/$ × ((1 + 0.05) / (1 + 0.04)) = 0.505 pounds/dollar

The Spot Exchange Rate for the British Pound Is 0