Assume that the UK interest rate is 11 percent, while Australia's one-year interest rate is 12 percent. Assume interest rate parity holds. If the one-year forward rate of the Australian dollar was used to forecast the future spot rate, the forecast would reflect an expectation of:
A) depreciation in the Australian dollar's value over the next year.
B) appreciation in the Australian dollar's value over the next year.
C) no change in the Australian dollar's value over the next year.
D) information on future interest rates is needed to answer this question.

Question

Quizplus · Accepted Answer

Interest rate parity suggests that the currency with the higher interest rate (Australia) will depreciate relative to the currency with the lower interest rate (UK) to offset the interest rate differential.

Assume That the UK Interest Rate Is 11 Percent, While