ACCA FM · Chapter 14 · Question 6 of 10
The spot rate is 25.00 pesos per $1. One-year interest rates are 9% for pesos and 3% for dollars. Using interest rate parity, what is the one-year forward rate (pesos per $1, to 2 decimal places)?
Test yourself: pick an answer
Reveal answer & explanation
Correct answer: C) 26.46
Explanation
Interest rate parity: forward rate = spot x (1 + peso interest rate) / (1 + dollar interest rate) = 25.00 x 1.09 / 1.03 = 26.4563, which is 26.46 pesos per $1. The currency with the higher interest rate trades at a forward discount, so more pesos are needed per dollar in the forward market.
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