QUESTION 13 2.5 points You are given the following case: Interest rate in U.S. i

Question

QUESTION 13 2.5 points You are given the following case: Interest rate in U.S. is 13%, interest rate in Britain is 1 1 %, the spot rate of the pound is $1.30, and the forward rate is $1.60. Given the information, we can concude that: O IRP does not hold and the spot rate should fall and forward rate should O IRP holds and there is no possibility for interest rate arbitrage. OIRP does not hold and the spot and forward rates must increase. increase IRP does not hold and the spot rate should increase and foreign interest rate should fall. IRP does not hold and the spot rate and foreign interest rate should fall

Explanation / Answer

correct option is "C"

Expected forward rate = Spot rate (1+iUs)/(1+iB)

                 = 1.30 (1+.13)/(1+.11)

                 = 1.30 *1.13 /1.11

                 = $ 1.3234

since the actual forward rate is higher than expected future rate ,IRP does not holds.The expected future spot rate will increase from current spot rate.

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