The current spot rate between Australian dollars and Canadian dollars is A$1.015 per $1. The rate on Canadian T-bills is 5% and the rate on an Australian risk-free security is 10%. What is the approximate two-year forward rate if interest rate parity holds?

Question

Quizplus · Accepted Answer

Interest rate parity implies that the forward exchange rate should adjust to offset the interest rate differential between two countries. Using the formula for interest rate parity: Forward Rate = Spot Rate * (1 + Interest Rate of Domestic Currency) / (1 + Interest Rate of Foreign Currency). Here, Forward Rate = 1.015 * (1 + 0.10)^2 / (1 + 0.05)^2 = 1.119.

The Current Spot Rate Between Australian Dollars and Canadian Dollars