The one-year forward exchange rate for the British Pound is $1.70/Pound. If the one-year U.S. interest rate is 5% and the one-year British interest rate is 6%, compute the implied spot exchange rate in $/Pound.

Question

Quizplus · Accepted Answer

B) Implied spot rate = Forward rate × (1 + foreign interest rate) / (1 + domestic interest rate)
Implied spot rate = $1.7/Pound × (1 + 0.06)/(1 + 0.05) = $1.72/Pound

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