Question

In: Finance

Assume the spot price of the British pound is currently $1.8. If the risk-free interest rate...

Assume the spot price of the British pound is currently $1.8.

If the risk-free interest rate on 1-year government bonds is 4.4% in the United States and 7.2% in the United Kingdom, what must be the forward price of the pound for delivery one year from now?

(Do not round intermediate calculations. Round your answer to 3 decimal places.)

Solutions

Expert Solution

SOLUTION

Spot rate- GBP 1 = USD 1.8

Interest rate in united states i.e., other currency = 4.4%

Interest rate in united kingdom i.e., base currency = 7.2%

According to interest rate parity theory,

Forward rate = Spot rate (1+ interest rate of other currency ) / (1+ interest rate of base currency)   

   = USD 1.8 ( 1+0.044 ) / (1+0.072)

   = USD 1.753

Therefore forward rate of pound is USD 1.753

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

The current spot price of the British Pound in USD is USD 1.25. The USD risk-free...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free rate is 2% while the British Pound risk-free rate is 3% for all maturities. Both rates are annual and continuously compounded. a) Calculate the futures price of the British Pound in USD for delivery in six months. b) Given the same spot rate and the same British Pound risk-free rate, calculate the implied annual risk-free rate in USD if the price of the equity...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free rate is 2% while the British Pound risk-free rate is 3% for all maturities. Both rates are annual and continuously compounded. a) Calculate the futures price of the British Pound in USD for delivery in six months. b) Given the same spot rate and the same British Pound risk-free rate, calculate the implied annual risk-free rate in USD if the price of the equity...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free rate is 2% while the British Pound risk-free rate is 3% for all maturities. Both rates are annual and continuously compounded. a) Calculate the futures price of the British Pound in USD for delivery in six months. b) Given the same spot rate and the same British Pound risk-free rate, calculate the implied annual risk-free rate in USD if the price of the equity...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free...
The current spot price of the British Pound in USD is USD 1.25. The USD risk-free rate is 2% while the British Pound risk-free rate is 3% for all maturities. Both rates are annual and continuously compounded. a) Calculate the futures price of the British Pound in USD for delivery in six months. b) Given the same spot rate and the same British Pound risk-free rate, calculate the implied annual risk-free rate in USD if the price of the equity...
Covered Interest Arbitrage. Assume the following information: * British pound spot rate = $1.65. * British...
Covered Interest Arbitrage. Assume the following information: * British pound spot rate = $1.65. * British pound one-year forward rate = $1.65 * British one-year interest rate = 12 %. * U.S. one-year interest rate = 10 %. Explain how U.S. investors could use covered interest arbitrage to lock in a higher yield than 9 percent. What would be their yield? Explain how the spot and forward rates of the pound would change as covered interest arbitrage occurs.
Currently, the spot rate is $1.28/£. As a trader, you believe that the British pound will...
Currently, the spot rate is $1.28/£. As a trader, you believe that the British pound will appreciate significantly in the near future. You decide to speculate by buying a December call option with a strike price of $1.35/£ and a premium of $0.05/£. Please answer the following questions: 1. Explain briefly why buying a call option makes sense in this case. 2. How much is the intrinsic value of the option? And how much is the time value? 3. Please...
Currently, the spot rate is $1.33/£. As a trader, you believe that the British pound will...
Currently, the spot rate is $1.33/£. As a trader, you believe that the British pound will depreciate significantly in the near future. You decide to speculate by buying a December put option with a strike price of $1.35/£ and a premium of $0.05/£. Please answer the following questions: 1. Explain briefly why buying a put option makes sense in this case. 2. How much is the intrinsic value of the option? And how much is the time value? 3. Please...
Currently, the spot rate is $1.33/£. As a trader, you believe that the British pound will...
Currently, the spot rate is $1.33/£. As a trader, you believe that the British pound will depreciate significantly in the near future. You decide to speculate by buying a Decemberput option with a strike price of $1.35/£ and a premium of$0.05/£. Please answer the following questions: 1. Explain briefly why buying a put option makes sense in this case. 2. How much is the intrinsic value of the option? And how much is the time value? 3. Please fill in...
Currently, the spot rate is $1.28/£. As a trader, you believe that the British pound will...
Currently, the spot rate is $1.28/£. As a trader, you believe that the British pound will appreciate significantly in the near future. You decide to speculate by buying a December call option with a strike price of $1.35/£ and a premium of $0.05/£. Please answer the following questions: 1. Explain briefly why buying a call option makes sense in this case. 2. How much is the intrinsic value of the option? And how much is the time value? 3. Please...
The spot exchange rate for the British pound is $1.2576. The U.S. interest rate is 0.25...
The spot exchange rate for the British pound is $1.2576. The U.S. interest rate is 0.25 percent, and the British interest rate is 0.50 percent. A futures contract on the exchange rate for the British pound expires in 110 days. (a) Find the appropriate futures price. [3M] (b) Find the futures price under the assumption of continuous compounding. [3M] (c) Suppose the actual futures price is $1.3250. Is the future contract mispriced? If yes, how could an arbitrageur take advantage...
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT