If one-year nominal interest rate in the U.S. is 3%, while the one-year nominal interest rate in Australia is 5%. The spot rate

Question

3 years ago

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If one-year nominal interest rate in the U.S. is 3%, while the one-year nominal interest rate in Australia is 5%. The spot rate

of the Australian dollar is $.96. Interest Parity is held. You will need 5 million Australian dollars in one year. Today, you purchase a one-year forward contract in Australian dollars. How many U.S. dollars will you need in one year to fulfill your forward contract?

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1 answer:

Mariana [72] · Answer 1 · 2022-07-19T12:13:04+03:00

Answer:

to get 5,00,000 australian dollar at the forward rate we are goign to need 4,704,000 US dollars

Explanation:

spot x (1 + (US rate - Australia rate) x time)

0.96 x (1+(0.03-0.05)x1 year) =

0.96 x 0.98 = 0.9408 forward exchange rate

$5,000,000 Australian Dollar * 0.9408 = 4,704,000 US dollars