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Assume the spot price of the British pound is currently $1.85. If the risk-free interest rate on 1-year government bonds is 5

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Answer #1

Answer

As per the Interest Rate Parity Theory,

Forward Rate = Sport rate {(1+i$)/ (1+i£)}

where i$ means interest rate in USA and i£ means Interest rate in UK

So = 1.85 {(1+0.053)/ (1+ 0.062)}

= $ 1.834

1 year forwards Price of Pound as per Interest Rate Parity Theory is $ 1.834

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