Final answer:
The forward rate calculated using the interest rate parity formula, given the spot rate, domestic risk-free interest, and foreign risk-free interest, is approximately 1.6305. This result does not match any of the provided options, indicating a possible error in the question data.
Step-by-step explanation:
To calculate the forward rate when given the spot rate, domestic interest rate, and foreign interest rate, you can use the interest rate parity formula, which states that the forward rate should adjust so that the return on a risk-free investment in two different currencies will be the same when measured in a common currency.
The formula for calculating the forward rate (F) is given by the following relationship:
F = S × (1 + domestic risk-free rate) / (1 + foreign risk-free rate)
Applying the given numbers:
F = 1.6535 × (1 + 0.035) / (1 + 0.05)
F = 1.6535 × 1.035 / 1.05
F = 1.6535 × 0.985714286
F ≈ 1.6305
This result does not match any of the options provided (a. 1.4761, b. 1.6535, c. 1.3247, d. 1.2500). It's possible there might be a typo or miscalculation in the question, or in the provided options. However, the process shown here is the correct way to compute the forward rate using the interest rate parity relationship.