The UK sterling risk-free rate is assumed to be 5.5% per year,and all standard deviations are assumed to be 20% per year.The current spot exchange rate is £0.73/? and the one-year risk-free rate is 3.5% in France.Find the forward price one year from now.

Question

Quizplus · Accepted Answer

The forward price can be calculated using the interest rate parity formula, which is $F = S \times \frac{(1 + r_d)}{(1 + r_f)}$, where $F$ is the forward rate, $S$ is the spot rate, $r_d$ is the domestic interest rate, and $r_f$ is the foreign interest rate. Plugging in the given values: $F = 0.73 \times \frac{(1 + 0.055)}{(1 + 0.035)} = 0.73 \times \frac{1.055}{1.035} = £0.7441$.

The UK Sterling Risk-Free Rate Is Assumed to Be 5