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 one-year
Forward rate if interest rate parity holds?

Question

Quizplus · Accepted Answer

According to interest rate parity, the forward rate should be such that:
(1 + Canadian T-bill rate) x (forward rate) = (1 + Australian risk-free rate) x (spot rate)
Plugging in the values:
(1 + 0.05) x (forward rate) = (1 + 0.1) x (1.015)
1.05 x (forward rate) = 1.1165
Forward rate = 1.1165 / 1.05
Forward rate = 1.0633 or A$1.0633 per $1. Therefore, the best choice is C.

The Current Spot Rate Between Australian Dollars and Canadian Dollars