You can buy or sell the £ spot at $1.98 to the pound. You can buy or sell the pound one-year forward at $2.01 to the pound. If U.S. annual interest rates are 5%, what must be the approximate one-year British interest rate if interest rate parity holds? A. 4.00% B. 2.75% C. 5.25% D. 3.48%
You can buy or sell the £ spot at $1.98 to the pound. You can buy or sell the pound one-year forward at $2.01 to the pound. If U.S. annual interest rates are 5%, what must be the approximate one-year British interest rate if interest rate parity holds? A. 4.00% B. 2.75% C. 5.25% D. 3.48%
Chapter9: Forecasting Exchange Rates
Section: Chapter Questions
Problem 16QA
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Question
You can buy or sell the £ spot at $1.98 to the pound. You can buy or sell the pound one-year forward at $2.01 to the pound. If U.S. annual interest rates are 5%, what must be the approximate one-year British interest rate if interest rate parity holds?
A. |
4.00% |
|
B. |
2.75% |
|
C. |
5.25% |
|
D. |
3.48% |
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