Question

Your Australian friend is a foreign exchange student in Boston. Because of the travel restrictions in place, she is unable to return to Australia. To fund her accommodation and living expenses in the US, she decides to invest some money for 245 days.

She can invest in Australia, where annualised 245-day interest rates are currently 3.94%. Alternatively, she can convert her Australian dollars into USD at a current spot rate of AUD0.8505/USD and invest at an annualised 245-day interest rate of 6.04% in the US.

If interest rate parity holds, what is the annualised forward premium or discount that the USD should trade at (relative to the Australian dollar) in the 245-day forward market?

Assume one year equals 360 days.

Select one:

a. -2.02%

b. 2.05%

c. -1.37%

d. 1.39%

e. -1.72%

Answer 1