At present, the spot exchange rate is $1.50/£ and the three-month forward exchange rate is $1.52/£. The interest rate of three month is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Suppose that you can borrow as much as $1,500,000 or £1,000,000. Find out whether the interest rate parity is holding currently.
Let’s summarize the given data primary:
S = $1.5/£; F = $1.52/£; I$ = 2.0%; I£ = 1.45%
Credit = $1,500,000 or £1,000,000.
(1+I$) = 1.02
(1+I£)(F/S) = (1.0145)(1.52/1.50) = 1.0280
Therefore, IRP is not holding exactly.