d) Assume that interest rate parity exists. You expect that the one-year nominal interest rate in...
d) Assume that interest rate parity exists. You expect that the one-year nominal interest rate in the U.S. is 1.995%, while the one-year nominal interest rate in Australia is 3.695%. The spot rate of the Australian dollar is USD0.6939. You will need 15 million Australian Dollars in one year.
Today, you purchase a one-year forward contract in Australian Dollars. Estimate how many U.S. Dollars (USD) will you need in one year to fulfill your forward contract.
Homework Answers
According to the interest rate parity,
Exchange rate after 1 year = Spot rate*(1+Interest rate in US)/(1+Interest rate in Australia)
Exchange rate after 1 year = 0.6939*1.01995/1.03695 = USD 0.6825
15 million Australian dollar equivalent in USD after 1 year = 15*0.6825 million USD = USD 10.2378 million
Hence you willl need 10.2378 million USD
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