Interest Rate Parity If the spot rate between the U.S.dollar and the New Zealand dollar is $1 = NZD1.5215,and if the interest rate in the United States is 8 percent and in New Zealand is 4 percent,then what should be the three-month forward exchange rate?

Question

Quizplus · Accepted Answer

The correct answer is A because the forward exchange rate should be $0.6637. This is because the interest rate parity formula is:F = S * (1 + i_d) / (1 + i_f)where:F is the forward exchange rateS is the spot exchange ratei_d is the domestic interest ratei_f is the foreign interest rateIn this case, we have:S = $1 = NZD1.5215i_d = 8%i_f = 4%Plugging these values into the formula, we get:F = $1 * (1 + 0.08) / (1 + 0.04)F = $1 * 1.08 / 1.04F = $0.6637

Interest Rate Parity If the Spot Rate Between the U