Change in Forward Premium over Time Assume that the one-year interest rate in the United Kingdom is 9 percent, whereas the one-year interest in the United States is 4 percent. The spot rate of the pound is $1.50 . Assume that interest rate parity exists. The quoted one-year interest in the United Kingdom is expected to rise consistently over the next month. Meanwhile, the quoted one-year interest rate in the United States is expected to decline consistently over the next month. Assume that the spot rate does not change over the month. Based on this information, how will the quoted one-year forward rate change over the next month?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 7, Problem 54QA
Textbook Problem

Change in Forward Premium over Time Assume that the one-year interest rate in the United Kingdom is 9 percent, whereas the one-year interest in the United States is 4 percent. The spot rate of the pound is $1.50 . Assume that interest rate parity exists. The quoted one-year interest in the United Kingdom is expected to rise consistently over the next month. Meanwhile, the quoted one-year interest rate in the United States is expected to decline consistently over the next month. Assume that the spot rate does not change over the month. Based on this information, how will the quoted one-year forward rate change over the next month?

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