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Investments and exchange rate

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Reference no: EM13116571

Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return. In the U.S., 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 $1.65. If interest rate parity holds, what is the spot exchange rate?

(a) 1 pound = $1.8000

(b) 1 pound = $1.6582

(c) 1 pound = $1.0000

(d) 1 pound = $0.8500

(e) 1 pound = $0.6031

Reference no: EM13116571

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