Assume the spot price of the British pound is currently $2.00. If the risk-free
ID: 2799914 • Letter: A
Question
Assume the spot price of the British pound is currently $2.00. If the risk-free interest rate on 1-year government bonds is 4% in the United States and 6% in the United Kingdom, what must be the forward price of the pound for delivery 1 year from now? (Round your answer to 3 decimal places. Omit the "$" sign in your response.)
Assume the spot price of the British pound is currently $2.00. If the risk-free interest rate on 1-year government bonds is 4% in the United States and 6% in the United Kingdom, what must be the forward price of the pound for delivery 1 year from now? (Round your answer to 3 decimal places. Omit the "$" sign in your response.)
Explanation / Answer
As per Interest rate parity F= S* (1+ interest rate factoring one country/ 1+ interest rate factor of another country)
F= 2* (1.04/ 1.06)= 2.2048
The forward rate of British Pound is $ 2.20 approx.