If annualized interest rates in the U.S.and France on January 1,1991 are 9% and 13%,respectively,and the spot value of the franc is $.1109,then at what 180-day forward rate will interest rate parity hold?
A)$.1070
B)$.1150
C)$.1088
D)$.1130

Question

Quizplus · Accepted Answer

According to interest rate parity, the difference in interest rates between two countries should be equal to the percentage difference between the two countries' currencies in a forward exchange rate.

In this case, we have:
- US interest rate = 9%
- French interest rate = 13%
- Spot value of franc = $0.1109

To find the 180-day forward rate, we can use the following formula:
(1 + foreign interest rate) / (1 + domestic interest rate) = forward rate / spot rate

Plugging in the numbers we have:
(1 + 0.13) / (1 + 0.09) = forward rate / 0.1109
1.13 / 1.09 = forward rate / 0.1109
forward rate = 0.1150

Therefore, the 180-day forward rate is $0.1150. The closest option is C, which is the correct answer.

If Annualized Interest Rates in the U