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Chapter 7

Q. 7.ST.5

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.

Step-by-Step

Verified Solution

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.