Assume that interest rate parity holds. The U.S. one-year interest rate is 10 percent, and the Australian one-year interest rate is 8 percent. What will the approximate effective yield of a one-year deposit denominated in U.S. dollars be for an Australian citizen? Assume the deposit is covered by a forward sale of dollars.

Question

Quizplus · Accepted Answer

Interest rate parity implies that the difference in interest rates between two countries is offset by the forward exchange rate. Therefore, the effective yield for an Australian citizen would be the Australian interest rate of 8 percent.

Assume That Interest Rate Parity Holds