The one-year forward exchange rate is 45 INR/USD.If the one-year interest rate in the United States is 5% and in India is 8%,what is the spot exchange rate so as to preclude arbitrage?

Question

Quizplus · Accepted Answer

The spot exchange rate can be calculated using the interest rate parity formula, which ensures no arbitrage opportunities. The formula is: Spot Rate = Forward Rate / [(1 + foreign interest rate) / (1 + domestic interest rate)]. Plugging in the given values: Spot Rate = 45 / [(1 + 0.08) / (1 + 0.05)] = 43.75 INR/USD.

The One-Year Forward Exchange Rate Is 45 INR/USD