Final answer:
The one-year forward exchange rate can be calculated using interest rate parity. We add the interest rate differential to the spot exchange rate to find the forward exchange rate. In this case, the one-year forward exchange rate is $1.68.
Step-by-step explanation:
In this case, we are given that the interest rate in the United Kingdom is 10 percent and the interest rate in the United States is 11 percent.
We are also given that the spot exchange rate is $1.67/£1 and interest rate parity holds. Interest rate parity states that the difference in interest rates between two countries should equal the difference in their forward exchange rates. So, in order to find the one-year forward exchange rate, we need to calculate the difference in interest rates between the UK and the US and add it to the spot exchange rate.
First, we calculate the interest rate differential: 11% - 10% = 1%.
Next, we convert this percentage difference into a decimal: 1% = 0.01.
Finally, we add this decimal to the spot exchange rate to find the one-year forward exchange rate:
$1.67 + 0.01 = $1.68.