The One-Year Forward Exchange Rate for the British Pound Is

question 58

Multiple Choice

The one-year forward exchange rate for the British Pound is $1.90/Pound. If the one-year U.S. interest rate is 4% and the one-year British interest rate is 6%, compute the implied spot exchange rate in $/Pound.

• A) $1.89/pound
• B) $1.90/pound
• C) $1.92/pound
• D) $1.94/pound

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Definitions:

Profit

The financial gain obtained when the amount of revenue gained from a business activity exceeds the expenses, costs, and taxes needed to sustain the activity.

Price

The sum of money anticipated, demanded, or provided as compensation for something.

Long-run Equilibrium

A state in which economic forces such as supply and demand are balanced, and all adjustments to economic conditions have been made, often characterized by firms earning normal profit in perfectly competitive markets.

Short-run Equilibrium

A state where supply and demand are balanced at a particular price level within a short-term period, with at least one fixed input.