If the spot rate S/£ is $1.3050 and the US interest rate is 3% and the...

Question

Question

If the spot rate S/£ is $1.3050 and the US interest rate is 3% and the UK interest rate is 4%, then one year equilibrium forward rate is

Answer 1

Answer #1

As per interest rate parity, Forward rate = Spot rate*(1+interest rate US)/(1+Interest rate UK)

= 1.3050*(1.03)/(1.04)

= $1.29245/Pound

i.e. $1.2925/Pound

Answer 2

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