Suppose 90-Day Investments in Britain Have a 6% Annualized Return

question 14

Multiple Choice

Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return.In the U.S., 90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return.In the 90-day forward market, 1 British pound equals $1.65.If interest rate parity holds, what is the spot exchange rate?

• A) 1 pound = $1.8000
• B) 1 pound = $1.6582
• C) 1 pound = $1.0000
• D) 1 pound = $0.8500
• E) 1 pound = $0.6031

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