The spot rate for euro is 0.5849 euros for one Australian dollar,and the one year forward rate is €0.5720 = A$1.The risk-free rate in the Eurozone is 4.10%.If interest rate parity exists,a one-year risk-free security is yielding ___ % per annum.

Question

Quizplus · Accepted Answer

According to interest rate parity, the forward exchange rate should be:

Forward rate = Spot rate x (1+Eurozone interest rate)/ (1+Australian interest rate)

€0.5720 = 0.5849 x (1+0.0410)/(1+r)

Where r is the Australian risk-free interest rate. Solving for r:

r = 0.0636 or 6.36%

Therefore, the answer is B.

The Spot Rate for Euro Is 0