The spot exchange rate for Indian Rupees is Rs 44/$. The one-year forward exchange rate is Rs 46/$ and the one-year Australian interest rate is 5%. What is the implied one-year interest rate in India?

Question

Quizplus · Accepted Answer

The implied one-year interest rate in India can be calculated using the interest rate parity formula, which states that the forward exchange rate is determined by the spot exchange rate and the interest rates in the two countries. The formula is F = S * (1 + i_d) / (1 + i_f), where F is the forward exchange rate, S is the spot exchange rate, i_d is the domestic interest rate (India in this case), and i_f is the foreign interest rate (Australia in this case). Rearranging the formula to solve for i_d gives i_d = [(F / S) * (1 + i_f)] - 1. Substituting the given values: i_d = [(46 / 44) * (1 + 0.05)] - 1 = 1.0977 - 1 = 0.0977 or 9.77%.

The Spot Exchange Rate for Indian Rupees Is Rs 44