If annualized interest rates on January 1,1985 in the U.S.and France were 9% and 13%,respectively,and the spot value of the franc was $.1109,then at what 180-day forward rate would interest rate parity hold?
A)$.1070
B)$.1150
C)$.1088
D)$.1130

Question

Quizplus · Accepted Answer

According to interest rate parity, the percentage difference between the two countries' interest rates should equal the percentage difference between their forward exchange rates. We can use this formula to solve for the 180-day forward rate:

13% - 9% = (180-day forward rate - $.1109) / $.1109

Simplifying, we get:

.04 = 180-day forward rate / $.1109 - 1

180-day forward rate / $.1109 = 1 + .04 = 1.04

180-day forward rate = $.1109 x 1.04 = $.1150

Therefore, the best choice is C: $.1088.

If Annualized Interest Rates on January 1,1985 in the U