Question

Assume that interest rate parity (IRP) exists. You expect that the one-year nominal interest rate in the U.S. is 7%, while the one-year nominal interest rate in Australia is 11%. The spot rate of the Australian dollar is $0.60. 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 your forward contract

Answer 1

US $5,784,000

Step-by-step explanation:

As per interest rate parity, forward rate = Spot rate*(1+Interest rate U.S.)/(1+interest rate Australia)

= 0.60*(1.07)/(1.11)

= 0.5784 /A$

Australian Dollars required in one year = 10,000,000

U.S. Dollars required = 10,000,000 * 0.5784 /A$

U.S. Dollars required = $5,784,000

So, the number of U.S. dollars you will need in one year to fulfill the forward contract is 5,784,000.