Final answer:
The question asks for the forward exchange rate based on the spot rate and the interest rates between the U.S. and the U.K., but after calculation, none of the provided multiple-choice options are correct.
Step-by-step explanation:
The student is asking about calculating the forward exchange rate based on the current spot rate and the difference in interest rates between two countries. In this case, the countries are the United States (U.S.) and the United Kingdom (U.K.). The forward exchange rate can be estimated using the Interest Rate Parity (IRP) theory, which states that the difference in interest rates between two countries is equal to the differential between the forward exchange rate and the spot exchange rate when adjusted for the time period.
To calculate the forward exchange rate, we use the formula:
F = S × (1 + i_d) / (1 + i_f)
where:
- F is the forward exchange rate
- S is the spot exchange rate
- i_d is the domestic interest rate (U.S. interest rate)
- i_f is the foreign interest rate (U.K. interest rate)
By plugging in the values provided:
F = $1.50 × (1 + 0.04) / (1 + 0.09) = $1.50 × 1.04 / 1.09
After calculating the above formula, we find that the correct forward exchange rate is not among the options provided (a) $2.14, (b) $2.36, (c) $2.50, or (d) $2.78. Thus, we need to clarify the rates or the given options.