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You are given that the annual Australian dollar interest rate is 1% and the United States annual interest rate is 2.5%. The spot rate for

You are given that the annual Australian dollar interest rate is 1% and the United States annual interest rate is 2.5%. The spot rate for the United States dollar is $A1.20.

(a) Using interest rate parity, calculate the forward rate premium of the United States dollar with respect to the Australian dollar. (3 marks)

(b) Using your answer to (a), calculate the one-year forward rate. (3 marks)

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