QuestionMay 22, 2025

Assume the one-year forward rate for the British pound is £.7381= 1 The spot rate is £.7392= 1 The interest rate on a risk-free asset in the UK is 3.4 percent. If interest rate parity exists, what is the one-year risk-free rate in the U.S.? Final Exam Excel.xlsx 6.68% 4.58% 3.55% 2.63% 8.67%

Assume the one-year forward rate for the British pound is £.7381= 1 The spot rate is £.7392= 1 The interest rate on a risk-free asset in the UK is 3.4 percent. If interest rate parity exists, what is the one-year risk-free rate in the U.S.? Final Exam Excel.xlsx 6.68% 4.58% 3.55% 2.63% 8.67%
Assume the one-year forward rate for the British pound is £.7381= 1 The spot rate is £.7392= 1 The interest rate on a risk-free asset in the UK is 3.4 percent. If interest rate
parity exists, what is the one-year risk-free rate in the U.S.?
Final Exam Excel.xlsx
6.68% 
4.58% 
3.55% 
2.63% 
8.67%

Solution
4.0(238 votes)

Answer

4.58\% Explanation 1. Identify Interest Rate Parity Formula Use the formula for interest rate parity: F = S \times \frac{(1 + r_d)}{(1 + r_f)}, where F is the forward rate, S is the spot rate, r_d is the domestic interest rate (UK), and r_f is the foreign interest rate (US). 2. Rearrange Formula to Solve for US Interest Rate Rearrange to find r_f: r_f = \frac{S}{F} \times (1 + r_d) - 1. 3. Substitute Known Values Substitute F = 0.7381, S = 0.7392, and r_d = 0.034 into the formula: r_f = \frac{0.7392}{0.7381} \times (1 + 0.034) - 1. 4. Calculate US Interest Rate Perform calculation: r_f = \frac{0.7392}{0.7381} \times 1.034 - 1 = 0.0458.

Explanation

1. Identify Interest Rate Parity Formula<br /> Use the formula for interest rate parity: $F = S \times \frac{(1 + r_d)}{(1 + r_f)}$, where $F$ is the forward rate, $S$ is the spot rate, $r_d$ is the domestic interest rate (UK), and $r_f$ is the foreign interest rate (US).<br /><br />2. Rearrange Formula to Solve for US Interest Rate<br /> Rearrange to find $r_f$: $r_f = \frac{S}{F} \times (1 + r_d) - 1$.<br /><br />3. Substitute Known Values<br /> Substitute $F = 0.7381$, $S = 0.7392$, and $r_d = 0.034$ into the formula: $r_f = \frac{0.7392}{0.7381} \times (1 + 0.034) - 1$.<br /><br />4. Calculate US Interest Rate<br /> Perform calculation: $r_f = \frac{0.7392}{0.7381} \times 1.034 - 1 = 0.0458$.
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