A trader collects the below information to devise his forex management strategy during the next year:

Spot Rate of USD: INR 74.40

Interest rates in USA: 2.5%

Interest rates in India: 6.5%

1. What is Interest Rate Parity Theory? What will be the expected exchange rate in the above case, if the interest rate parity theory is assumed to hold good. Also calculate the forward premium or discount.
2. What is covered interest arbitrage? If there is a one-year forward contract available at INR 75.60, is there a CIA possible, and if yes,write the steps to earn arbitrage profit (use an equivalent amount of INR 1000000)

Answer rating: 100% (QA)

Interest Rate Parity Theory IRP The Interest Rate Parity IRP theory suggests a relationship between a countrys interest rate and its currencys exchang... View the full answer