Suppose the 360-day forward exchange rate is 1.657 dollars per British pound, and the current spot rate is 1.625 dollars per British pound. If the 360-day interest rate in the United States is 5% and the 360-day interest rate in Great Britain is 3%, is the market in equilibrium according to the interest rate parity theory?

a. No, because the higher interest rate in the United States (2%) implies that the forward exchange rate should be 2% lower than the current spot rate.

b. No, because the forward premium on the pound is 2% while the interest rate in the United States is 67% higher than the interest rate in Great Britain.

c. Yes, because the forward premium on the pound (2%) is exactly offset by the lower interest rate in Great Britain.

d. Cannot be determined without knowing the amount of money being exchanged.

A U.S. corporation investing in a foreign corporation by purchasing stock on a foreign stock exchange is an example of direct foreign investment.

True

False

Most major countries in the world have agreed on fixed exchange rates in order to facilitate international trade.

True

False

The forward exchange rate quoted today should be equal to the spot rate in the future.

True

False