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11 June, 23:10

Assume interest rate parity exists. If the spot rate on the British pound is $2 and the 1-year British interest rate is 7 percent, and the 1-year U. S. interest rate is 11 percent, what is the pound's forward discount or premium?

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  1. 11 June, 23:39
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    The pound's forward discount or premium is 3.74%

    Explanation:

    The current spot rate is 1 Pound = $2

    The interest rate parity exists, then:

    The forward rate:

    1 Pound*1.07 = $2*1.11

    1.07 Pound = $2.22

    1 pound = $2.0748

    The Premium in Pound = $2.0748 - $2

    = $0.0748

    Premium rate = $0.0748/$2*100

    = 3.74%

    Therefore, The pound's forward discount or premium is 3.74%
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