Suppose that General Electric exported a 120' wind turbine to Scotland and billed £5,000,000 that is...
Suppose that General Electric exported a 120' wind turbine to Scotland and billed £5,000,000 that is payable in one year. The money market interest rates and foreign exchange rates are below:
U.S. 1-yr rate: 3.3%
U.K. 1-yr rate: 5.5%
Spot rate: $1.50/ £
One-year forward rate: ???
What should the one-year forward rate be for the Pound if Interest Rate Parity holds?
Homework Answers
| Future rate=Spot rate*((1+Quoted currency Risk free rate)/(1+Base currency Risk free rate))^time |
| Future rate=1.5*((1+0.033)/(1+0.055))^1 |
| Future rate(USD/GBP) = 1.4687 |
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