The One-Year Forward Exchange Rate Is Rupees 40

question 59

Multiple Choice

The one-year forward exchange rate is Rupees 40/$. If the one-year interest rate in the United States is 4% and in India is 7%, what is the spot exchange rate so as to preclude arbitrage?

• A) Rupees 38.88/$
• B) Rupees 39.01/$
• C) Rupees 39.23/$
• D) Rupees 39.32/$

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Definitions:

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The original monetary value of an asset or liability, recorded at the time of its acquisition or incurrence.

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The estimated price at which an asset or liability could be exchanged between knowledgeable, willing parties in an arm's length transaction.

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