Assume that the spot exchange rate is $1\mathrm{.}38$ USD$/$GBP$,$ while interest rates are $3\mathrm{.}2\%$ in the US and $2\mathrm{.}5\%$ in the UK$.$

a$.$ According to international parity conditions, what is the expected $6-$month forward exchange rate?

b$.$ You believe that political conditions are such that the GBP will lose value in the coming six months. What position should you take in the forward market?

c$.$ If you take the position chosen in part B and the spot rate in six months is $1\mathrm{.}40$ USD$/$GBP$,$ how much money would you have made or lost $($in USD$)$ based on a notional investment of GBP $2\mathrm{.}5$ million?

Answer rating: 100% (QA)

a To calculate the expected 6month forward exchange rate using the interest rate parity IRP formula ... View the full answer