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

Using the interest rate parity formula: (1 + i a) = (1 + i c ) x (Fwd rate), where i a and i c are the interest rates of Australia and Canada respectively, and the Fwd rate is the two-year forward rate.
Plugging in the given interest rates, we get:
(1 + 0.1) = (1 + 0.05) x (Fwd rate)
Simplifying and solving for the Fwd rate, we get:
Fwd rate = (1 + 0.1)/(1 + 0.05) = 1.0952
Therefore, the approximate two-year forward rate is 1.0952 x 1.015 = A$1.113 (rounded to three decimal places) or A$1.119 per $1 (rounded to the nearest cent). 
Thus, the best choice is C, because it is the only answer that is close to our calculated value of A$1.119.

The Current Spot Rate Between Australian Dollars and Canadian Dollars