The current exchange rate is one Australian dollar (AUD) equal to 1.349 USD. In the United...

The current exchange rate is one Australian dollar (AUD) equal to 1.349 USD. In the United States, the 6 months T-bill rate is 2.84%. The 6-month forward rate for AUD is .75 USD/AUD. Assuming that interest rate parity exists, what is the implied interest rate for Australia?

	A.	5.19%
	B.	-2.35%
	C.	2.35%
	D.	.49%

Expert Solution

Spot rate = AUD 1.349/USD

Forward = 1/0.75 = AUD 1.3333333333/USD

Forward rate = Spot rate * (1 + interest rate for U.S/2)/(1 + interest rate for Australia/2)

1.3333333333 = 1.349 * (1 + 0.0284/2)/(1 + interest rate for Australia/2)

1.3333333333 = 1.3681558/(1 + interest rate for Australia/2)

(1 + interest rate for Australia/2) = 1.3681558/1.3333333333

(1 + interest rate for Australia/2) = 1.02611685

Interest rate for Australia/2 = 1.02611685 - 1

Interest rate for Australia/2 = 0.02611685

Interest rate for Australia = 0.02611685 * 2

Interest rate for Australia = 0.0522337

Interest rate for Australia = 5.22%

Option A is correct: 5.19%

jeff jeffy answered 2 years ago

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