Question

Assume the one-year interest rate is 12% on British pounds and 9% on U.S. dollars. If...

Assume the one-year interest rate is 12% on British pounds and 9% on U.S. dollars.

  • If the current exchange rate of the pound is $1.63, what is the expected future spot in one year?
  • Suppose a change in expectations causes the expected future spot rate to decline to $1.52. What should happen to the U.S. interest rate?
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Homework Answers

Answer #1

A)

Forward Rate =

Spot Rate : 1 Pound = $1.63

=

= 1.5863

1 Pound = $1.5863

B)

Forward Rate =

Spot Rate : 1 Pound = $1.63

Forward Rate : 1 Pound = $1.52

1.52  =

1.52 * 1.12 / 1.63 = 1 + USA Interest Rate

1.04441717791 - 1 = USA Interest Rate

USA Interest Rate = 4.44%

US Interest Rates will fall to 4.44%

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