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The Current Exchange Rate between Brazil and U.K. is One British Pound Equals 4.5 Brazilian Real....

The Current Exchange Rate between Brazil and U.K. is One British Pound Equals 4.5 Brazilian Real. The one year Annual Interest Rate in UK is 1%, while the Annual Interest Rate in Brazil is 8% . Given this, what would you expect the Forward Rate to be between Brazilian Real and British Pounds, one year from now? Explain your steps.

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Answer #1

Forward exchange rate =Spot rate (1+ibrazilian)/(1+i UK)

                                     = 4.5 (1+ .08)/(1+.01)

                                    = 4.5 *1.08/1.01

                                    = 4.81188 Brazilian real per pound

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