Use the information below to answer the following questions. (Enter your answer

Question

Use the information below to answer the following questions. (Enter your answer as directed, but do not round intermediate calculations.) Suppose interest rate parity holds, and the current risk-free rate in the United States is 3 percent per six months. Requirement 1: What must the six-month risk-free rate be in Australia? (Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Risk-free rate % Requirement 2: What must the six-month risk-free rate be in Japan? (Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Risk-free rate % Requirement 3: What must the six-month risk-free rate be n Great Britain? (Enter your answer as a percent rounded to 2 decimal places (e.g., 32.16).) Risk-free rate

Explanation / Answer

Answer: We can arrange the approximate interest rate parity condition to answer this question. The equation we will use is:

Rrc=(Forward rate - Spot rate)/Spot rate+Rus

Using this relationship, we find:

1:

Australia:Rrc =(1.2344-1.2389)/1.2389+0.03

=0.0263677 or 2.63677%

2:

Japan: Rrc= (99.9300-100.4500)/100.4500+0.03

=0.024823 or 2.4823%

3:

Great Britain:Rrc= (0.6776-0.6797)/0.6797+0.03

=0.026910 or 2.6910%

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