Suppose the 360-Day Forward Exchange Rate Is 1

question 66

Multiple Choice

Suppose the 360-day forward exchange rate is 1.657 dollars per British Pound,and the current spot rate is 1.625 dollars per British Pound.If the 360-day interest rate in the United States is 5% and the 360-day interest rate in Great Britain is 3%,is the market in equilibrium according to the interest rate parity theory?

• A)Yes,because the forward premium on the pound (2%)is exactly offset by the lower interest rate in Great Britain.
• B)No,because the higher interest rate in the United States (2%)implies that the forward exchange rate should be 2% lower than the current spot rate.
• C)No,because the forward premium on the pound is 2% while the interest rate in the U.S is 67% higher than the interest rate in Great Britain.
• D)Cannot be determined without knowing the amount of money being exchanged.

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