The spot exchange rate is $1.7777/£. The risk-free rate is 5% in the United Stat

Question

The spot exchange rate is $1.7777/£. The risk-free rate is 5% in the United States and 7% in the United Kingdom. What is the forward exchange rate? (Assume a 1-year contract.) Round your answer to four decimal places.

Please answer using the following formula:

F £ = the forward price for British pounds, expressed as the number of pounds per dollar, for delivery in n years

S0 = the spot price for British pounds, expressed as the number of pounds per dollar, Q£ /Q$, at time 0

R$ = the risk-free rate of interest at time 0 for borrowing/lending in U.S. Dollars

R £ = the risk-free rate of interest at time 0 for borrowing/lending in British pounds

n = number of years until the settlement date of the contract

Explanation / Answer

Future Rate = $1.7777(1 + 0.07)1/(1 + 0.05)1

= $1.8116

Future rate = $1.8116/£

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