It is July 1,1990.Suppose the spot rates for the pound,mark,and Swiss franc are $1.30,$.35,and $.40,respectively.The associated 90-day interest rates annualized are 16%,8%,and 4%,while the U.S.90-day interest rate annualized is 12%.What is the 90-day forward rate on an ACU ACU 1 = £1 + DM1 + SFr1 if interest parity holds?
A)$2.0512
B)$2.1134
C)$2.0397
D)$2.0489

Question

Quizplus · Accepted Answer

Using interest rate parity:

(1 + 0.12) = (1 + 0.16) x (1 + x)/(1 + 0.08) x (1 + y)/(1 + 0.04) x (1/1.3) x (1/0.35) x (1/0.40)

Solving for x and y:

x = 0.0489 or 4.89%
y = 0.0160 or 1.60%

Using the forward rate formula:

F = S x (1 + d1)/(1 + d2)

F = (1.30 + 0.35 + 0.40) = 2.05

d1 = 0.0489
d2 = 0.0160

F = 2.0489 or $2.05

Therefore, the answer is D) $2.0489.

It Is July 1,1990