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Spot Exchange Rate; cross rate between dollars and euros.

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In Britain, 90 day investments have a 4 % annualized return. In the US, 90 day investments of similar risk have a 1% annualized return. In the 90 day forward market, 1 British pound equals $1.66. Also, 1 British pound equal 1.16 Euros.

a. If interest rate parity holds, what is the spot exchange rate?
b. Which currency is selling at a premium? Why?
c. What is the cross rate between Dollars and Euros?
$1.00 = ? Euros.

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Solution Summary

The solution examines spot exchange rates. The cross rate between dollars and euros is examined.

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In Britain, 90 day investments have a 4 % annualized return. In the US, 90 day investments of similar risk have a 1% annualized return. In the 90 day forward market, 1 British pound equals $1.66. Also, 1 British pound equal 1.16 Euros.

a. If interest rate parity holds, what is the spot exchange rate?
According to interest rate parity f/s=((1+r in ...

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