Forward Rates for Different Time Horizons
Solve the following problem:
Assume that interest rate parity (IRP) exists. Assume this information provided by today's Wall Street Journal: Spot rate of British pound ¼ $1.80 6-month forward rate of pound ¼ $1.82 12-month forward rate of pound ¼ $1.78
a. Is the annualized 6-month U.S. risk-free interest rate above, below, or equal to the British risk-free interest rate?
b. Is the 12-month U.S. risk-free interest rate above, below, or equal to the British risk-free interest rate?