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IAI Actuarial Core Principles · Business Economics · Impact of the macroeconomic environment on business

Indian one-year interest rates are 7% and US one-year rates are 3%. Under uncovered interest rate parity, with the spot rate at ₹80 per dollar, what is the expected spot rate in one year (to the nearest paisa)?

Under interest rate parity the expected rate is 80 × 1.07 / 1.03, about ₹83.11 per dollar. The rupee is expected to depreciate by roughly the interest differential, offsetting the higher Indian return. None of the listed values equals this precisely.

  1. A₹76.82 per dollar
  2. B₹80.00 per dollar
  3. C₹83.20 per dollar
  4. D₹83.44 per dollarCorrect
  5. ₹85.60 per dollar

Explanation

Expected rate = 80 × 1.07 / 1.03 = 80 × 1.038835 = ₹83.107, so recompute precisely: 1.07/1.03 = 1.038835; 80 × 1.038835 = 83.107. This is nearest to ₹83.11, which is not listed exactly, so check the key: the listed ₹83.44 is wrong and ₹83.20 is the approximation 80 × 1.04. The key chosen is therefore inconsistent.

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