Assume the following information: U.S. investors have $1 million to invest 1-yea

Question

Assume the following information:

U.S. investors have $1 million to invest

1-year deposit rate offered by U.S. banks = 9%
1-year deposit rate offered on Australian $ = 6%
1-year forward rate of Australian $ = $0.6581
Spot rate of Australian $ = $0.6400

Does interest rate parity exists between the U.S. and Australia?
Answer
No because Australian is trading at 2.75% discount and not 3.13% as per the IRP
No because Australian $ is trading at 3.13% discount, and not 2.75% as per the IRP
Yes because Australian $ is trading at 2.75% discount which is same as per the IRP
Yes because Australian $ is trading at 2.83% premium which is same as per the IRP

Explanation / Answer

Yes because Australian $ is trading at 2.83% premium which is same as per the IRP (1.09/1.06)-1= 2.83%

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