An Australian company has receivables of USD100,000, due in six months. The current AUD/USD exchange rate is 1.7900/1.8000, the six-month Australian interest rate is 3.4/3.5%pa and the six-month U.S. interest rate is 2.5/2.6%pa. Calculate the implied forward rate achieved via a money market hedge.
A) 1.7971
B) 1.8089
C) 1.7988
D) 1.8000

Question

Quizplus · Accepted Answer

The implied forward rate using a money market hedge can be calculated using the interest rate parity formula. The formula is: Forward Rate = Spot Rate * (1 + Domestic Interest Rate) / (1 + Foreign Interest Rate). Using the mid-point of the spot rate (1.7950) and the given interest rates, the calculation yields approximately 1.7971.

An Australian Company Has Receivables of USD100,000, Due in Six