Assume the current U.S. Dollar-British spot rate is $1.4300/£. If the current nominal one-year interest rate in the U.S. is 5% and the comparable rate in Britain is 6%, what is the approximate forward exchange rate for 360 days?
Answer:-
Given
Spot rate = $ 1.4300 / Pound
Interest rate US = 5 %
Interest rate Britain = 6 %
Forward rate = Spot rate x [ ( 1+ R (us)
)360/365 / ( 1 + R ( Britain) )360/365 ] ( US
is the price currency and Britain Pound is base currency)
We should consider 365 days for forward exchange rate contracts
during calculation
Forward rate = $ 1.43 /pound x [ 1.05360/365 /
1.06360/365 ]
= $ 1.43 / pound x [ 1.050.9863 / 1.060.9863
]
= $ 1.43 / pound x [ 1.0493 / 1.05915 ]
= $ 1.43 / pound x 0.9907
= $ 1.4167 / pound
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