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Calculate the interest rate per annum for a six-month deposit or borrowing in the US dollar ($), based on the data provided below:
Exchange rates of US dollar ($) against the UK sterling (£) have been quoted:
Spot $1 = £1.7574
Six months’ forward = £1.7245The interest rate in UK is 5% per year for a six-month deposit or borrowing.
a 4.45%
b 9.95%
c 7.00%
d 8.90%Answer – D
Could you please help me on this problem?
Thanks a lot,
The formula for calculating the forward rate is given on the formula sheet. Here you have to use the formula ‘backwards’.
The UK interest for 6 months is 2.5%
Therefore 1.7245 = 1.7574 x (1.025 / (1+i) ), where i is the six month US interest rate.
It is then basic arithmetic to find that i = 0.0445 or 4.45%So the annual interest rate = 2 x 4.45% = 8.90%
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