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Abhishek Patil
on Nov 28, 2024

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Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return.In Canada,90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return.In the 90-day forward market,1 British pound equals $1.96.If interest rate parity holds,what is the spot exchange rate?

A) 1 pound = $1.9700
B) 1 pound = $1.8582
C) 1 pound = $1.4308
D) 1 pound = $0.8500

Interest Rate Parity

A theory suggesting that the difference in interest rates between two countries is equal to the differential between the forward exchange rate and the spot exchange rate.

Annualized Return

The geometric average amount of money earned by an investment each year over a given time period, expressed as a percentage.

Spot Exchange Rate

The current market price for exchanging one currency for another, used for immediate currency transactions.

  • Understand the principles of interest rate parity and how it affects currency exchange rates.
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Michael RescinetoNov 29, 2024
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