Assume That Interest Rate Parity Holds

question 24

Multiple Choice

Assume that interest rate parity holds. The UK five-year interest rate is 5% annualized, and the Brazilian five-year interest rate is 8% annualized. Today's spot rate of the Brazilian real is £0.25. What is the approximate five-year forecast of the real's spot rate if the five-year forward rate is used as a forecast?

• A) £0.2431
• B) £0.2571
• C) £0.2878
• D) £0.2165
• E) £0.2175

---

Definitions:

Financial Reporting

The process of disclosing financial results and related information by organizations to various stakeholders, including external entities like investors, creditors, and regulatory bodies.

Future Net Cash Flows

The projection of cash receipts minus cash payments over a future period, related to an asset or investment.

Accrual Accounting

The method of accounting that recognizes revenue when earned and expenses when incurred regardless of when cash transactions occur.

Deferrals

Financial transactions that are recognized in a later accounting period than the period in which they occur, such as prepaid expenses.