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Chapter 8

Q. 8.MSE.9

Assume that interest rate parity exists. The one-year nominal interest rate in the United States is 7 percent, while the one-year nominal interest rate in Australia is 11 percent. The spot rate of the Australian dollar is $.60. Today, you purchase a one-year forward contract on 10 million Australian dollars. How many U.S. dollars will you need in one year to fulfill your forward contract?

Step-by-Step

Verified Solution

[(1.07)/(1.11)] – 1 = -3.60%. So the one-year forward rate is

$.60 × [1 + (-.036)] = $.5784

You will need 10,000,000 × $.5784 = $5,784,000.