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Foreign exchange risk

Question 8

IRPT non-annual periods

The current exchange rate between US$ and £ is $1.23 = £1.

If interest in the UK is anticipated to be 4% over the next year and in the US will
be 7%, calculate the forward rate for delivery in:

(a) 2 years’ time

(b) 6 months’ time.

2
2
(a) F 0 = 1.23 × 1.07 /1.04 = $1.302 = £1
(b) 6 month simple interest: UK = 2%, US = 3.5%

F 0 = 1.23 × 1.035/1.02 = $1.248 = £1

Illustrations and further practice

Now try TYU questions 5 and 6 from Chapter 13.

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