Equilibrium according to interest rate parity theory

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Suppose the 360-day forward exchange rate is 1.657 dollars per British pound, and the current spot rate is 1.625 dollars per British pound. If the 360-day interest rate in the United States is 5% and the 360-day interest rate in Great Britain is 3%, is the market in equilibrium according to the interest rate parity theory?

a. No, because the higher interest rate in the United States (2%) implies that the forward exchange rate should be 2% lower than the current spot rate.

b. No, because the forward premium on the pound is 2% while the interest rate in the United States is 67% higher than the interest rate in Great Britain.

c. Yes, because the forward premium on the pound (2%) is exactly offset by the lower interest rate in Great Britain.

d. Cannot be determined without knowing the amount of money being exchanged.

Reference no: EM131354180

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