The annualized interest rates in the US and France on January 1, 1991 are 9% and 13%,
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Question:
The annualized interest rates in the US and France on January 1, 1991 are 9% and 13%, respectively. The spot value of the franc is 0.1109 per dollar.
a) What is the expected exchange rate (franc/$) in one year?
b) At what 180-day forward rate will covered interest rate parity be maintained? [Note: You must calculate 180-day interest rates to find the solution.]
c) At what one-year forward rate will covered interest rate parity be maintained?
d) Suppose the one-year exchange rate is expected to rise to $0.15 due to lower inflation in the U.S. Do you want to buy or sell forward?
Expert Answer:
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