The one-year forward exchange rate for the British Pound is $1.80/Pound. If the one-year U.S. interest rate is 4.5% and the one-year British interest rate is 6%, compute the implied spot exchange rate in $/Pound.

Question

Quizplus · Accepted Answer

C) Implied Spot rate = Forward Rate × (1 + foreign interest rate) / (1 + domestic interest rate)
Implied Spot rate = $1.8 /Pound × (1 + 0.06) / (1 + 0.045) = $1.83/Pound

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