The current spot exchange rate between Australian dollars and UK pounds is A$1 = 0.400 pounds.Interest rates for one year are 5 per cent for pounds and 15 per cent for dollars.What is the expected spot exchange rate in one year's time?

Question

Quizplus · Accepted Answer

The expected spot exchange rate in one year can be calculated using the interest rate parity (IRP) formula, which states that the expected change in the exchange rate between two currencies is equal to the difference in their interest rates. The formula is: E(S1) = S0 * (1 + i_foreign) / (1 + i_domestic), where E(S1) is the expected exchange rate in one year, S0 is the current spot exchange rate, i_foreign is the foreign interest rate, and i_domestic is the domestic interest rate. Plugging in the given values: E(S1) = 0.400 * (1 + 0.05) / (1 + 0.15) = 0.400 * 1.05 / 1.15 = 0.3652.

The Current Spot Exchange Rate Between Australian Dollars and UK