# Foreign Interest Rate

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

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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))
= 1.9423

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.

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