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Pls,
The current spot rate for $ against £ is $/£ 1.8420.
Interest rate in U.S. is 5% p.a; whereas it is 4% in the UK.
What would you expect the 3months forward rate to be?
Interest Rate Parity
Fo = So x (1+ic)/(1+ib)
Fo = Future Exchange Rate
So = Spot Rateib= Your Interest
ic= Their interestSo,
Fo = 1.8420 x (1+0.04)/(1+0.05)
Hence, Fo = 1.8244
Am I correct? :/
Salman is not correct for two reasons.
The interest rates given are yearly rates. For a 3 month forward rate you need to use 3 month interest rates. i.e. 3/12 x 5% = 1.25%; and 3/12 x 4% = 1%
So the forward rate is 1.8420 x 1.0125/1.01 = 1.8466
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