Question

Use the information below to answer the following questions. Australia dollar 6-months forward Japan Yen 6-months forward U.K. Pound 6-months forward Currency per U.S. $ 1.2384 1.2349 100.4000 99.9800 .6792 .6781 Suppose interest rate parity holds, and the current risk-free rate in the United States is 4 percent per six months. Use the approximate interest rate parity equation to answer the following questions. Requirement 1: What must the six-month risk-free rate be in Australia? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Risk-free rate 3.71 % Requirement 2: What must the six-month risk-free rate be in Japan? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Risk-free rate 3.57 % Requirement 3: What must the six-month risk-free rate be in Great Britain? (Enter your answer as a percent rounded to 2 decimal places, e.g., 32.16.) Risk-free rate 3.88 %

Answer 1

Answer:

1 US$ = 1.2384 Australia Dollar

6 month forward 1 US$ = 1.2349 Australia Dollar

Requirement 1)

As per Interest Rate Parity:-

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

1.2349/1.2384=Interest in Australia/0.04

Hence Interest in Australia= 1.2349*0.04/1.2384= 3.99%

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

99.98/100.40=Interest in Japan/0.04

Hence Interest in Japan = 99.98*0.04/100.40= 3.98%

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

0.6781/0.6792=Interest in Great Britain/0.04

Hence Interest in Great Britain= 0.6781*0.04/0.6792= 3.99%