IAI Actuarial Core Principles · Business Economics · Globalisation and multinational business
The spot rate is ₹80 per US dollar. Indian one-year interest rates are 8% and US one-year rates are 4%. Under covered interest rate parity, what is the one-year forward rate, to the nearest paisa?
The forward rate is about ₹83.08 per dollar. Covered interest parity gives forward equals spot times 1.08 divided by 1.04, which is 80 times 1.0385. The higher Indian interest rate is offset by a forward depreciation of the rupee.
- A₹76.92 per dollar
- B₹80.00 per dollar
- C₹83.08 per dollarCorrect
- D₹84.00 per dollar
- ₹86.40 per dollar
Explanation
Forward = spot × (1 + rupee rate)/(1 + dollar rate) = 80 × 1.08/1.04 = 80 × 1.038462 = 83.08. Option D wrongly adds the rate difference of 4% simply to the spot rate. Option A inverts the ratio.
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