The spot exchange rate for the British pound is 0.65 pounds/dollar. The one-year interest rate in the United States is 5% and the one-year interest rate in Britain is 7%. Based on these rates,
what one-year forward exchange rate is consistent with the absence of arbitrage?
A) 0.646 pounds/dollar
B) 0.652 pounds/dollar
C) 0.662 pounds/dollar
D) 0.674 pounds/dollar
Answer: C
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