Suppose 90-day investments in Britain have a 6.00% annualized return and a 1.50% quarterly (90-day)return.In the U.S. ,90-day investments of similar risk have a 4.00% annualized return and a 1.00% quarterly (90-day)return.In the 90-day forward market,1 British pound equals $1.50.If interest rate parity holds,what is the spot exchange rate ($/£)? Do not round the intermediate calculations and round the final answer to four decimal places.

Question

Quizplus · Accepted Answer

The correct answer is A because the spot exchange rate is $1.5074. This can be calculated using the formula:Spot exchange rate = Forward exchange rate * (1 + (domestic interest rate / 100)) / (1 + (foreign interest rate / 100))In this case, the forward exchange rate is $1.50, the domestic interest rate is 4.00%, and the foreign interest rate is 6.00%. Plugging these values into the formula, we get:Spot exchange rate = $1.50 * (1 + (4.00% / 100)) / (1 + (6.00% / 100))Spot exchange rate = $1.50 * (1.04) / (1.06)Spot exchange rate = $1.5074

Suppose 90-Day Investments in Britain Have a 6