Question: Annualized interest rates in the U.S. and France on January 1, 1991 are 9% and 13%, respectively. The spot value of the franc is 0.1109 per dollar.
a) What is the expected exchange rate (franc/$) in one year?
b) At what 180day forward rate will covered interest rate parity hold? [Note: You need to compute the 180day interest rates to work out the solution.]
c) At what one-year forward rate will covered interest rate parity hold?
d) Suppose the one-year exchange rate is expected to increase to $0.15 due to lower U.S. inflation. Do you want to buy or sell forward?