In this question, interest rate of UK and United States are given of 30 days but still we are dividing it by 12 to get the answer. Kindly explain it sir.
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The interest rates provided are annual interest rates, but the question asks for the 30-day forward exchange rate. To calculate the 30-day forward exchange rate, you need to adjust the annual interest rates to the appropriate time period, which is one month (30 days). This is why you divide by 12 (for the 12 months in a year) to get a monthly interest rate.
Here’s how the calculation works:
Forward Rate = Spot Rate x (1 + Foreign Interest Rate) / (1 + Domestic Interest Rate)
Now, calculate the forward rate:
Forward Rate = 1.5775 x (1 + 0.2083%) / (1 + 0.125%)
Forward Rate = 1.5775 x (1.002083) / (1.00125)
Forward Rate ≈ 1.5788
So, the 30-day forward USD/GBP exchange rate should be approximately 1.5788, which corresponds to option B: 1.5788.