Explanation:
Since we have assumed that the covered interest rate parity holds, then the forward rate parity holds. That is, a one-year spot rate should be equal to the one-year forward rate. That is,
The forward rate is calculated by multiplying the spot rate of AUD/GBP by the ratio of (1 + GBP interest rate) to (1 + AUD interest rate). Plugging in the values: 0.0074 × (1.0696/1.0075) = 0.0074 × 1.0616 ≈ 0.0079. This reflects the interest rate differential between the two currencies, where GBP has a higher interest rate than AUD, causing the AUD/GBP forward rate to be higher than the spot rate.
Q.3826 Consider the following information
| Currency | Libor (annualized) | Currency Combinations | Spot Rate |
|---|---|---|---|
| CAD | 0.62% | CAD/GBP | 0.60 |
| GBP | 6.96% | AUD/GBP | 0.0074 |
| AUD | 0.75% | AUD/CAD | 0.95 |
If the covered interest rate parity holds, what is the forward rate of AUD/GBP currency for one year?
A. 0.0070
B. 0.0079
C. 0.0063
D. 0.0054
A
0.0070
B
0.0079
C
0.0063
D
0.0054
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