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Assume the current U.S. dollar-British spot rate is 0.6993£/$. If the current nominal one-year interest rate in the U.S. is 5% and the comparable rate in Britain is 6%, what is the approximate forward exchange rate for 360 days? Select one: a. £0.6993/$ b. £0.7060/$ c. £1.42/$ d. £1.43/$

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Answer:

The answer is B. £0.7060/$

Explanation:

The forward exchange rate is the exchange rate at which a party is willing to exchange one currency for another at a future date when it enters into a forward contract with the other party

The formula for forward exchange rate = Spot rate x [(1 + foreign interest rate) / (1 + domestic interest rate) ]

Spot rate is 0.6993£/$

Foreign interest rate is 6%

Domestic interest rate is 5%

0.6993£/$ x (1 + 0.06/1 + 0.05)

0.6993£/$ x 1.06/1.05

= 0.7060

£0.7060/$

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