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International Fisher effect 5. If the spot market exchange rate for the Australian dollar is 0.7851,...

International Fisher effect

5. If the spot market exchange rate for the Australian dollar is 0.7851, the 3-month Reserve Bank of Australia interest rate is 1.99%, and the 3-month interest rate on US Treasury debt is 1.35%, what is the expected exchange rate for the Australian dollar in three months?

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Answer #1

Fwd rate = Spot Rate * ( 1+ Hi ) / ( 1+ Fi)

Fi is Int rate in Australia & Hi is int rate in US

Given Int rate in Australia is 1.99% per anum , Int rate for 3 months = 1.99% * 3/12 = 0.4975%

Given Int rate in Australia is 1.35% per anum , Int rate for 3 months = 1.35% * 3/12 = 0.3375%

Fwd rate = Spot Rate * ( 1+ Hi ) / ( 1+ Fi)

= USD 0.7851 * (1+ 0.003375) / ( 1+ 0.004975)

= USD 0.7851 * 1.003375 /1.004975

= USD 0.7839

After 3 monthsExpected Fwd rate 1 AUD = 0.7869 USD

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