Suppose 90-day investments in Britain have a 6% annualized return and a 1.5% quarterly (90-day) return. In the U.S., 90-day investments of similar risk have a 4% annualized return and a 1% quarterly (90-day) return. In the 90-day forward market, 1 British pound equals $1.65. If interest rate parity holds, what is the spot exchange rate?
A. 1 pound = $1.8000
B. 1 pound = $1.6582
C. 1 pound = $1.0000
D. 1 pound = $0.8500
E. 1 pound = $0.6031
Answer: B
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