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If the interest rate in the United Kingdom is 10 percent, the interest rate in the...

If the interest rate in the United Kingdom is 10 percent, the interest rate in the United States is 11 percent, the spot exchange rate is $1.67/£1, and interest rate parity holds, what must be the one-year forward exchange rate? (Do not round intermediate calculations. Round your answer to 4 decimal places. (e.g., 32.1616))

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Answer #1

Spot Rate given in the question is = $1.67/ £1

i.e., £1 = $1.67

Home currency is $, and the county of this quote is United States and it is a direct quote in United States

One year forward exchange rate =

accoerding to Interest Rate Parity Theory =

FORWARD RATE / SPOT RATE = 1+RIGHT HAND SIDE INTEREST / 1+LEFT HAND SIDE INTEREST

i.e., FR/SR = 1+RHS INTEREST RATE / 1+LHS INTEREST RATE

FR/1.67 = (1+ 0.11) / (1+0.10)

FR of £1 = $1.685

Note:- In the formula RHS and LHS is for the quote, we have to look at the quote i.e., £1=$1.67. Here £ is on the left hand side and the $ is on the right hand side.

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