Question
Currently, the spot exchange rate is $0.85/Australian dollar, and the one-year forward exchange rate is $0.81/Australian dollar. The interest rate is 3.5% in the United
Currently, the spot exchange rate is $0.85/Australian dollar, and the one-year forward exchange rate is $0.81/Australian dollar. The interest rate is 3.5% in the United States and 4.2% in Australia. You may borrow up to $1,000,000 or Australian 1,176,471, which is equivalent to $1,000,000 at the current spot rate.
- Determine if the Covered Interest Rate Parity (CIP) is holding in this scenario.
- If the CIP is not holding, explain how you would realize a profit in US dollar terms. You need to explain with concrete numerical analysis.
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Principles Of Corporate Finance Law
Authors: Eilis Ferran, Look Chan Ho
2nd Edition
0199671354, 978-0199671359
