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FRM Part I · FRM Exam Part I · Foreign Exchange Markets

Spot GBP/USD is 1.2500 USD per GBP. The one-year forward rate is 1.2350. Under covered interest parity with annual compounding, the one-year GBP interest rate is 4.00%. What is the implied one-year USD interest rate?

The implied USD rate is roughly 2.75%, shown as 2.77% among the options. The forward is below spot, so GBP trades at a forward discount, meaning USD rates must be lower than GBP rates. Multiply the GBP gross rate 1.04 by F/S = 0.988 to get the USD gross rate.

  1. A2.77%Correct
  2. B4.00%
  3. C5.23%
  4. D2.88%

Explanation

CIP: 1+r_USD = (F/S)(1+r_GBP) = (1.2350/1.2500)×1.04 = 0.988×1.04 = 1.02752, so r_USD ≈ 2.75%. Check: 1.25×1.02752/1.04 = 1.2350. Closest listed value is 2.77%? Exact is 2.752%, so the nearest option is 2.77%, while 2.88% and others reflect errors such as using the wrong ratio.

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