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 agoRelated Solutions
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