Using interest rate parity theory, what GBP/USD spot rate would you expect to see in six months’ time?

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.

Using interest rate parity theory, what GBP/USD spot rate would you expect to see in six months’ time?
A . GBP/USD = 1.74
B . GBP/USD = 1.78
C . GBP/USD = 1.65
D . GBP/USD = 1.67

View Answer

Answer: A