2. Implications of IRP. Assume that interest rate parity exists. You expect that

Question

2. Implications of IRP.
Assume that interest rate parity exists. You expect that the one year nominal interest rate in the United States is 7 percent, while the one year nominal interest rate in Australia dollar is 11 percent. The spot rate of Australian dollars is $.60. You will need 10 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 you forward contract?

3. forecasting the future spot rate based on IFE
Assume that the spot exchange rate of the Singapore dollar is $.70. The one year interest rate is 11 percent in the United States and 7 percent in Singapore. What will the spot rate be in one year according to the IFE? What is the force that causes the spot rate to change according to the IFE?

Explanation / Answer

Nominal rate in US = 7% per annum Required dollars = 10million Australian dollars in one year spot rate = $0.60 Therefore required us dollars to fulfil the forward contract : 10000000 * 0.6 = 60000000 Australian dollars reqired future value = 60000000*(1+0.07)^1 =$64200000 2) us interest rate is = 11% and singapoor = 7% differance = 4% so the 4% has to be appriciate.. here spot price is $0.7, should appriciate with 0.7*4%=0.028 so the spot rate would be changed to 0.70+0.028=$0.728 the force here applied as from the changes in interest rates geographically...i.e. country to country.. =$64200000

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