The current indirect rate is 153,the interest rate in the foreign country is 1%,and the interest rate in the home country is 4%.What is the forward indirect rate if t = 2?

Question

Quizplus · Accepted Answer

We can use the formula for the forward exchange rate:

Forward rate = (Current rate * (1 + home interest rate)^t) / (1 + foreign interest rate)^t

Plugging in the values, we get:

Forward rate = (153 * (1+0.04)^2) / (1+0.01)^2
Forward rate = (153 * 1.0816) / 1.0201
Forward rate = 162.74 / 1.0201
Forward rate = 159.50

But we need the indirect rate, so we take the reciprocal:

Forward indirect rate = 1/159.50
Forward indirect rate = 0.00627

Now we need to determine the new spot rate using interest rate parity:

New spot rate = Current spot rate * (1 + home interest rate)^t / (1 + foreign interest rate)^t

Plugging in the values, we get:

New spot rate = 153 * (1 + 0.04)^2 / (1 + 0.01)^2
New spot rate = 153 * 1.0816 / 1.0201
New spot rate = 162.74 / 1.0201
New spot rate = 159.50

Finally, we calculate the forward indirect rate using the formula:

Forward indirect rate = New spot rate / (1 + home interest rate)^t
Forward indirect rate = 159.50 / (1 + 0.04)^2
Forward indirect rate = 144.30

Therefore, the best choice is B.

The Current Indirect Rate Is 153,the Interest Rate in the Foreign