Explaining Movements in Forward Premiums
Response to the following problem:
Assume that interest rate parity holds and will continue to hold in the future. At the beginning of the month, the spot rate of the British pound is $1.60, while the one-year forward rate is $1.50. Assume that U.S. annual interest rate remains steady over the month. At the end of the month, the one-year forward rate of the British pound exhibits a discount of 1 percent.
Explain how the British annual interest rate changed over the month, and whether it is higher, lower, or equal to the U.S. rate at the end of the month. British pound exhibits a discount of 1 percent.
Explain how the British annual interest rate changed over the month, and whether it is higher, lower, or equal to the U.S. rate at the end of the month.