Answer-first summary for fast verification
Answer: R$ 3.78
Using interest rate parity for a quote of **BRL per USD**: \[ F = S \times \frac{(1+i_{BRL})}{(1+i_{USD})} \] Substitute the values: \[ F = 3.500 \times \frac{1.09}{1.01} = 3.7772 \] Rounded to the nearest choice: \[ F \approx \text{R$ }3.78 \] So the correct answer is **C**.
Author: Manit Arora
Ultimate access to all questions.
Question 1.2. Assume that interest rates are 1.0% per annum with annual compounding in the United States and 9.0% in Brazil. A bank can borrow (by issuing CDs) or lend (by purchasing CDs) at these rates. The USD BRL spot exchange rate is R$3.500 per 1.0 US dollar. Which is nearest to the forward exchange rate implied by the interest rate parity theorem (quoted USD BRL with Brazilian real as the quote currency)?
A
R$2.85
B
R$3.54
C
R$3.78
D
R$4.07
No comments yet.