Forward Rate (interest parity):
spot rate*(1 + foreign interest rate) / (1 + domestic interest rate)
Forward Rate (Interest Parity) = 1 * (1+0.01) / (1 + 0.03)
= 1 * (1.01/1.03)
= 0.9806 Franc
Current Forward Rate = 0.96 Franc
= ($1,000,000 / 0.96) – ($1,000,000 / 0.9806)
= $1,041,666.67 – $1,019,783.81
Total Arbitrage Profit = $21,882.86
Question: Expound on interest parity theory in the aforementioned context. Is the above situation sustainable?
Future Spot Rate:
Spot rate at current * ((1 + US Inflation Rate) / (1 + British Inflation Rate))
Future Spot Rate = 2 * ((1 + 0.01) / (1 + 0.04))
1 Pound = $1.9432
Question: What is the meaning of the above in the context of PPP?
New Exchange Rate:
= 10 + ((1 + Foreign Currency Interest Rate) / (1 + Domestic Currency Interest Rate))
= 10 + ((1 + 0.07) / (1 + 0.05))
= 10 + 1.019
=10.19 Pesos per Dollar
Question: Explain the concept of IFE with the a for mentioned problem.
For more information on Foreign Interest Rate read this: https://en.wikipedia.org/wiki/Interest_rate
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