The spot exchange rate for Indian Rupees is Rs 41/$. The one-year forward exchange rate is Rs 42/$ and the one-year Australian interest rate is 4%. What is the implied one-year interest rate in India?

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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 can be rearranged to solve for the Indian interest rate (i₹):F/S = (1 + i₹) / (1 + i$)Where F is the forward exchange rate (42 Rs/$), S is the spot exchange rate (41 Rs/$), i₹ is the Indian interest rate, and i$ is the Australian interest rate (4%).Rearranging and solving for i₹ gives:i₹ = [(F/S) * (1 + i$)] - 1i₹ = [(42/41) * (1 + 0.04)] - 1i₹ = [(42/41) * 1.04] - 1i₹ = 1.06585365854 - 1i₹ = 0.06585365854 or 6.54%Therefore, the implied one-year interest rate in India is 6.54%.

The Spot Exchange Rate for Indian Rupees Is Rs 41