What is the expected one-year forward exchange rate between $A (AUD)and UK pounds (GBP)that maintains interest parity if interest rates on government securities in Australia yield 5.2% p.a.and 4.6% p.a.in the UK,and the spot exchange rate is AUD 1 = GBP 0.45?

Question

Quizplus · Accepted Answer

To maintain interest parity, we need to compare the interest rate differential between Australia and the UK with the expected appreciation or depreciation of AUD in the future. The formula for the one-year forward exchange rate is:

F = S * (1+rd) / (1+rf)

Where F is the forward exchange rate, S is the spot exchange rate, rd is the interest rate in the domestic country (UK), and rf is the interest rate in the foreign country (Australia).

Plugging in the values, we have:

F = 0.45 * (1+0.046) / (1+0.052) = 0.4474

Therefore, the expected one-year forward exchange rate between AUD and GBP that maintains interest parity is AUD 1 = GBP 0.4474. Thus, the correct choice is A).

What Is the Expected One-Year Forward Exchange Rate Between $A