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Question: Annualized interest rates in the U.S. and France on January 1, 1991 are 9% and 13%, respectively. The spot value of the franc is 0.1109 per dollar.

a) What is the expected exchange rate (franc/$) in one year?

b) At what 180day forward rate will covered interest rate parity hold? [Note: You need to compute the 180day interest rates to work out the solution.]

c) At what one-year forward rate will covered interest rate parity hold?

d) Suppose the one-year exchange rate is expected to increase to $0.15 due to lower U.S. inflation. Do you want to buy or sell forward?

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Basic Finance, Finance

Category:- Basic Finance
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