CA Final · Advanced Financial Management · International Financial Management
Spot is ₹80.00/USD. One-year interest rates are 8% in India and 4% in the US. Using interest rate parity, the one-year forward rate is closest to:
Interest rate parity sets the forward rate equal to spot times the ratio of domestic to foreign interest factors. Here 80 × 1.08/1.04 equals about ₹83.08. The rupee is at a forward discount because Indian interest rates are higher than US rates.
- A₹83.20
- B₹80.00
- C₹83.08Correct
- D₹76.92
Explanation
Forward = 80 × (1.08/1.04) = 80 × 1.038462 = ₹83.08. ₹83.20 comes from adding the 4% differential to spot (80 × 1.04), the wrong method. ₹76.92 inverts the ratio, and ₹80.00 ignores the interest differential.
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