Forward rate

This topic has 1 reply, 2 voices, and was last updated 11 years ago by John Moffat.

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December 4, 2014 at 4:03 pm #217436
sikha4
Member
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The current spot rate for the US$ against the pound is 1,8420
Interest in the us is 5% pa whereas it is 4% pa in the uk
What would you expect he 3month forward rate to be
December 4, 2014 at 5:05 pm #217517
John Moffat
Keymaster
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3 month interest in US is 5 x 3/12 = 1.25%
3 month interest in UK is 4 x 3/12 = 1%

So using interest rate parity formula, 3 month forward rate = 1.8420 x (1.0125/1.01) = 1.8466
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