The spot exchange rate for the British pound is 0.65 pounds/dollar. The one-year interest rate in the United States is 5% and the one-year interest rate in Britain is 7%. Based on these rates, what one-year forward exchange rate is consistent with the absence of arbitrage?

Question

Quizplus · Accepted Answer

C) Forward rate = Spot rate £/$ × ((1 + r_£)^T/ (1 + r_$)^T) Forward rate = £0.65/$ × ((1 + 0.07) / (1 + 0.05)) = 0.662 pounds/dollar

The Spot Exchange Rate for the British Pound Is 0