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The long-term prospects for interest rates in the UK and the USA are 2% and 6% per annum respectively.
The GBP/USD spot rate is currently GBP/USD1.71.
Usinginterestrateparitytheory, what GBP/USD spot rate would you expect to see insix months' time?
Suggested Answer: B, C, D
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34 comments · newest first
CH
Cherelle
11 months ago
Definitely using interest rate parity here!
RI
Rikki
11 months ago
Really? 1.78? That feels a bit high.
MI
Miriam
11 months ago
1.67 seems too low, don’t you think?
JO
Jonell
12 months ago
I think it’ll be closer to 1.74.
LI
Lizette
12 months ago
Interest rates are 2% for the UK and 6% for the USA.
MA
Maurine
12 months ago
I feel like I should be able to derive the expected rate using the interest rates, but I keep mixing up the steps.
LA
Laurel
1 year ago
I practiced a similar question last week, and I think the answer was around 1.74, but I’m not confident about the calculations.
MA
Martina
1 year ago
I think the GBP/USD spot rate should increase since the US has a higher interest rate, but I can't recall how to calculate the expected rate.
GA
Galen
1 year ago
I remember we covered interest rate parity in class, but I'm a bit unsure about the exact formula to use for this question.
EL
Elsa
1 year ago
Ah, interest rate parity - I remember learning about this in class. Let me think through the logic and make sure I apply the formula correctly. I've got this!
AS
Asha
1 year ago
This is a classic question on interest rate parity. I'm confident I can solve this by plugging the given information into the formula and doing the math. Should be a straightforward calculation.
SA
Sanda
1 year ago
Okay, I think I've got this. I'll need to use the formula for interest rate parity to find the expected spot rate in six months. Let me work through the calculations step-by-step.
ST
Stevie
1 year ago
Hmm, I'm a bit unsure about the interest rate parity theory and how to apply it here. I'll need to review my notes to make sure I understand the concept properly.
JE
Jeniffer
1 year ago
This looks like a straightforward interest rate parity question. I'll need to calculate the expected spot rate based on the given interest rates.
CH
Charlesetta
1 year ago
Ugh, interest rate parity... the only thing more confusing than that is trying to figure out how many licks it takes to get to the center of a Tootsie Pop. Oh well, let's give this a shot!
GW
Gwenn
1 year ago
C) GBP/USD = 1.65
JE
Jerilyn
1 year ago
B) GBP/USD = 1.78
ED
Edna
1 year ago
A) GBP/USD = 1.74
HU
Huey
1 year ago
This is a piece of cake! Just plug and chug the numbers into the parity formula. I could do this in my sleep. Although, I'd probably prefer to be sleeping right now instead of taking this exam.
RH
Rhea
1 year ago
Great, let's go with A) GBP/USD = 1.74 then.
ER
Ernie
1 year ago
I think it's A) GBP/USD = 1.74 too.
MA
Marleen
1 year ago
A) GBP/USD = 1.74
CH
Cheryll
2 years ago
I bet the correct answer is C) GBP/USD = 1.65. That's the only one that seems to match the expected depreciation of the GBP based on the interest rate differential.
ST
Stephanie
1 year ago
Yeah, I agree with you. C) GBP/USD = 1.65 seems like the most likely scenario based on the interest rates.
WI
Winifred
1 year ago
I don't think so, the interest rate parity theory suggests a different depreciation for the GBP.
IR
Iraida
1 year ago
But what about the possibility of GBP/USD = 1.74? Could that be a potential outcome?
LE
Leatha
1 year ago
I think you're right, C) GBP/USD = 1.65 makes sense with the interest rate difference.
DE
Denae
2 years ago
Hmm, let me think this through. The UK rate is 2% and the US rate is 6%, so the interest rate differential is 4%. Using the parity formula, I'd expect the GBP to depreciate against the USD by about 4% over the 6-month period.
CH
Cherelle
2 years ago
This question is a classic application of interest rate parity theory. The key is to calculate the expected change in the spot rate based on the interest rate differential between the two countries.
CA
Candida
1 year ago
I think the answer is A) GBP/USD = 1.74.
GI
Gianna
1 year ago
A) GBP/USD = 1.74
NE
Nelida
2 years ago
So, the answer would be B) GBP/USD = 1.78, right?
LO
Lorrine
2 years ago
I agree, with the higher interest rate in the USA, the GBP/USD spot rate should go up.
RE
Rebbecca
2 years ago
I think the GBP/USD spot rate will increase.