Using the Covered Interest Parity Condition,the Calculated Three-Year Forward Rate

question 15

Multiple Choice

Using the covered interest parity condition,the calculated three-year forward rate F₃ is closest to:

• A)$1.8568/£
• B)$1.9161/£
• C)$1.8961/£
• D)$1.8764/£

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Definitions:

Reinvestment Risk

The risk that future proceeds will have to be reinvested at a lower potential interest rate.

Interest Rate Risk

The risk that an investment's value will change due to a change in the absolute level of interest rates, in the spread between two rates, or in any other interest rate measure.

Duration Of Assets

The sensitivity of an asset's price to interest rate changes, expressed in years.

Duration Of Liabilities

A measure of the sensitivity of the price (the value of principal) of a fixed-income investment to a change in interest rates, expressed in years.