Question

Assume the current U.S. dollar-British spot rate is 0.6993£/$. If the current nominal one-year interest rate in the U.S. is 5% and the comparable rate in Britain is 6%, what is the approximate forward exchange rate for 360 days?

Answer 1

The approximate forward exchange rate is 0.705657

Step-by-step explanation:

The computation of the approximate forward exchange rate for 360 days is shown below:

Forward rate is

= Spot rate × (1 + pound interest rate)^n ÷ (1 + dollar interest rate)^n

= 0.6993 × (1 + 0.06)^1 ÷ (1 + 0.05)^1

= 0.6993 × 1.06 ÷ 1.05

= 0.705657

Hence, the approximate forward exchange rate is 0.705657