Question

Use the information below to answer the following questions. Currency per U.S. $ Australia dollar 1.2376 6-months forward 1.2357 Japan Yen 100.3200 6-months forward 100.0600 U.K. Pound .6793 6-months forward .6780 Suppose interest rate parity holds, and the current six month risk-free rate in the United States is 3 percent. Use the approximate interest rate parity equation to answer the following questions. a. What must the six-month risk-free rate be in Australia

Answer 1

Answer:

A. 3.00%

B. 2.99%

C. 2.99%

Explanation:

A. Calculation to determine What must the six-month risk-free rate be in Australia

As per Interest Rate Parity:-

Forward Rate/Spot Rate = Interest in Australia/ Interest In USA

1.2357/1.2376=Interest in Australia/0.03

Hence,

Interest in Australia=1.2357*0.03/1.2376

Interest in Australia= 2.995%

Interest in Australia=3.00%

Therefore What must the six-month risk-free rate be in Australia is 3.00%

B. Calculation to determine What must the six-month risk-free rate be in Japan

Forward Rate/Spot Rate = Interest in Japan/ Interest In USA

100.0600/ 100.3200 =Interest in Japan/0.03

Hence,

Interest in Japan =100.0600 *0.03/ 100.3200

Interest in Japan= 2.99%

Therefore What must the six-month risk-free rate be in Japan is 2.99%

3. Calculation to determine What must the six-month risk-free rate be in Great Britain

Forward Rate/Spot Rate = Interest in Great Britain/ Interest In USA

.6780 /.6793=Interest in Great Britain/0.03

Hence,

Interest in Great Britain= .6780*0.03/0.6793

Interest in Great Britain=2.99%

Therefore What must the six-month risk-free rate be in Great Britain is 2.99%