Question
Budapest Ltd is based in country H (functional currency H$). Some of Budapest Ltds suppliers are based in United Kindom (UK), and they invoice Budapest
Budapest Ltd is based in country H (functional currency H$). Some of Budapest Ltds suppliers are based in United Kindom (UK), and they invoice Budapest Ltd in British Pounds (GBP). Therefore, the finance department of Budapest Ltd monitors the exchange rate between the H$ and the GBP, and they use the interest rate parity theory to estimate the likely exchange rates. 6 The current spot rate of exchange is H$/GBP 37.50 (that is H$ 1 = GBP 37.50), and the expected interest rates in the UK and country H are 6% and 10% respectively over the next year. What is the forecast spot rate in one years time using the interest rate parity theory and assuming that the current forward rate is the best forecast of the future spot rate? (2) A H$/GBP 36.14 B H$/GBP 37.46 C H$/GBP 38.92 D H$/GBP 41.25
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