Assume that the British pound’s one-year forward rate exhibits a discount. Assume that interest rate parity continually exists. Explain how the discount on the British pound’s one-year forward discount would change if British one-year interest rates rose by 3 percentage points while U.S. one-year

Question

Assume that the British pound’s one-year forward rate exhibits a discount. Assume that interest rate parity continually exists. Explain how the discount on the British pound’s one-year forward discount would change if British one-year interest rates rose by 3 percentage points while U.S. one-year interest rates rose by 2 percentage points.

Accepted Answer

The one-year forward discount on pounds would become more pronounced (by about one percentage point more than before) because the spread between the British interest rates and U.S. interest rates would increase.

Question 7.ST.5: Assume that the British pound’s one-year forward rate exhibi...

Related Answered Questions

Explain in general terms how various forms of arbitrage can remove any discrepancies in the pricing of currencies. ...

Verified Answer:

Using the information in the previous question, does interest rate parity exist? Explain. ...

Verified Answer:

Assume the following information: Spot rate of £ = $1.60 180-day forward rate of £ = $1.56 180-day British interest rate = 4% 180-day U.S. interest rate = 3% Based on this information, is covered interest arbitrage by U.S. investors feasible (assuming that U.S. investors use their own funds)? ...

Verified Answer:

Assume that the following spot exchange rates exist today: £1 = $1.50 C$ = $.75 £1 = C$2 Assume no transaction costs. Based on these exchange rates, can triangular arbitrage be used to earn a profit? Explain. ...

Verified Answer: