If annualized interest rates in the U.S.and Switzerland are 10% and 4%,respectively,and the 90-day forward rate for the Swiss franc is $.3864,at what current spot rate will interest rate parity hold?
A)$.3902
B)$.3874
C)$.3807
D)$.3792

Question

Quizplus · Accepted Answer

Interest rate parity holds when the forward exchange rate is set such that the difference in interest rates between two countries is offset by the difference between the forward and spot exchange rates. Using the formula for interest rate parity: Spot Rate = Forward Rate * (1 + Interest Rate Domestic) / (1 + Interest Rate Foreign). Plugging in the given values: Spot Rate = 0.3864 * (1 + 0.10/4) / (1 + 0.04/4) = 0.3807.

If Annualized Interest Rates in the U