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FRM Part I · FRM Exam Part I · Foreign Exchange Markets

A bank quotes spot AUD/USD at 0.6600 USD per AUD and a one-year forward at 0.6700. The one-year USD rate is 4.50% annually compounded. Assuming covered interest parity holds, what is the implied one-year AUD interest rate, closest to:

Parity says forward over spot equals one plus the USD rate divided by one plus the AUD rate. The ratio 0.67/0.66 is 1.01515, so AUD gross rate is 1.045/1.01515 ≈ 1.0294, an implied AUD rate of about 2.95%.

  1. A2.95%Correct
  2. B3.00%
  3. C4.50%
  4. D6.09%

Explanation

F/S = (1+r_USD)/(1+r_AUD). 0.6700/0.6600 = 1.015152. So 1+r_AUD = 1.045/1.015152 = 1.02940, giving 2.94%, closest to 2.95%. The 6.09% option uses the wrong direction (1.045×1.015152).

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