The 6 month interest rate in the U.S. is 2%. The spot exchange rate for Australian dollars is 1.4063 to the U.S.dollar. The 6 months forward rate is 1.4259 to the U.S. dollar. These prices indicate that the 6 month risk-free rate in Australia is

Question

Quizplus · Accepted Answer

We can use the interest rate parity formula to solve for the risk-free rate in Australia:

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

Plugging in the given values, we get:

(1 + Australian interest rate) = (1 + 2%) x (1.4259 / 1.4063)
(1 + Australian interest rate) = 1.0139
Australian interest rate = 1.0139 - 1 = 0.0139 or 1.39%

Therefore, the 6 month risk-free rate in Australia is 0.60%, which is answer choice C.

The 6 Month Interest Rate in the U