Problem: The interest rates in the Swiss franc and the Australian dollar are .03

Question

Problem:

The interest rates in the Swiss franc and the Australian dollar are .03 and .05 respectively. If the ER is   1.4 SF per 1 AUD in the spot market, what will the future/forward ER be, if the IFE applies. Explicate the IFE.

Comment:

1. you have to do the problem according to two exchange rate approaches. One is the one currency is the denominator and the other is the other currency is the denominator. you have to do both currencies as the denominator ( That means you have to use Swiss franc and Australian dollar terms ).

2. Please i need a full answer for this problem with showing the work

Thank you.

Explanation / Answer

I. Approach 1(AUD is the base currency)

According to the IFE,

Forward ER = 1.4 SF/AUD * (1.03/1.05) = 1.3734 SF/AUD

II. Approach 2(SF is the base currency)

ER(in terms of SF) = 1/1.4 = 0.7143 AUD per 1 SF

According to the IFE,

Forward ER = 0.7143 AUD/SF * (1.05/1.03) = 0.7282 AUD/SF

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