What is the spot exchange rate


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Problem: In Britain, 90 day investments have a 4 % annualized return. In the US, 90 day investments of similar risk have a 1% annualized return. In the 90 day forward market, 1 British pound equals $1.66. Also, 1 British pound equal 1.16 Euros.

a. If interest rate parity holds, what is the spot exchange rate?

b. Which currency is selling at a premium? Why?

c. What is the cross rate between Dollars and Euros?

$1.00 = € Euros.

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