The one-year forward exchange rate for the British Pound is $1.90/Pound. If the one-year U.S. interest rate is 4% and the one-year British interest rate is 6%, compute the implied spot exchange rate in $/Pound.

Question

Quizplus · Accepted Answer

D) Implied Spot rate = Forward Rate × (1+ foreign interest rate) / (1+ domestic interest rate)
Implied Spot rate = $1.9/Pound × (1+ 0.06) / (1+ 0.04) = $1.94/Pound

The One-Year Forward Exchange Rate for the British Pound Is