The Spot Exchange Rate for the British Pound Is 0

question 58

Multiple Choice

The spot exchange rate for the British pound is 0.5 pounds/dollar. The one-year interest rate in Australia is 6% and the one-year interest rate in Britain is 5%. Based on these rates, what one-year forward exchange rate is consistent with the absence of arbitrage?

• A)0.495
• B)0.499
• C)0.484
• D)0.512

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Definitions:

Dividend Yield

The annual dividend payments to shareholders expressed as a percentage of the stock's current price.

Yield-To-Maturity

The total return anticipated on a bond if it is held until it matures, including all payments from interest and principal, calculated as an annual rate.

Zero-Coupon Bond

A bond that does not pay periodic interest payments and is sold at a discount from its face value. The bond's profit comes from the difference between its purchase price and its face value at maturity.

Yield To Maturity

The total return anticipated on a bond if the bond is held until it matures, including interest payments and the difference between the bond’s purchase price and its face value.