Reading 18: Currency Exchange Rates - LOS h, (Part 2) ～ Q white, class, black, following

mayanfang1

Q1. Given the following information:

§      The forward rate between dollars and pounds is 1.66$/GBP.

§      The current spot rate is 1.543 $/GBP.

§      The UK interest rate is 5.77%.

§      The interest rate in the United States is 5.976%.

Assume a U.S. investor can borrow pounds or dollars. What is the covered interest rate differential?

A)     −0.07814.

B)     0.6786.

C)     0.07661.

Q2. If (r_D − r_F) > Forward premium, which is (Forward D/F) − Spot(D/F) / Spot(D/F), then:

A)   borrow domestic currency and lend out foreign currency.

B)   arbitrage opportunities don't exist.

C)   borrow foreign currency and lend out domestic currency.

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