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Determine the covered interest rate parity

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Question 1: Today's GBP/USD spot rate is, X0USD/GBP = 1.28. Assume that rGBP = 6% and rUSD = 4%, if the 1-Year USD/GBP forward rate is F1USD/GBP = 1.28, according to the Covered Interest Rate parity (CIRP), is the GBP underpriced/overpriced in the actual forward contract? Which of the following is true?

  1. GBP is underpriced by 1.92%
  2. GBP is overpriced by 9.86%
  3. GBP is overpriced by 1.92%
  4. GBP is underpriced by 9.86%

Reference no: EM132479158

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