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suppose 90 days invesment in uk have a 6% annualized return and 1.5% quarterly (90days) return....

suppose 90 days invesment in uk have a 6% annualized return and 1.5% quarterly (90days) return. in the us 90 day invesments of similar risk have a 4% annualized return and a 1% quarterly return. In the 90 day forward market, 1 british pound equal 1.2855$. if interest rate parity holds, what is the spot exchange rate in dolars per Uk pound?

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Answer #1

Forward Rate = Spot Rate*(1+ Quarterly Rate of Variable Currency)/(1+Quarterly rate of Fixed currency )
1.2855 = Spot rate*(1+1%)/(1+1.5%)
Spot Exchange Rate = 1.2855*1.015/1.01=1.2919

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