To celebrate the removal of travel restrictions, you decide to take a long overseas holiday to...

 

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To celebrate the removal of travel restrictions, you decide to take a long overseas holiday to Europe. You will travel around Europe for 288 days. To fund your overseas trip, you decide to invest some money. You can invest in Australia, where annualised 288-day interest rates are currently 2.84%. Alternatively, you can convert your Australian dollars into Euros at a current spot rate of AUD0.8231/EUR and invest at an annualised 288-day interest rate of 6.1% in Europe. If interest rate parity holds, what is the annualised forward premium or discount that the Euro should trade at (relative to the Australian dollar) in the 288-day forward market? Assume one year equals 360 days. To celebrate the removal of travel restrictions, you decide to take a long overseas holiday to Europe. You will travel around Europe for 288 days. To fund your overseas trip, you decide to invest some money. You can invest in Australia, where annualised 288-day interest rates are currently 2.84%. Alternatively, you can convert your Australian dollars into Euros at a current spot rate of AUD0.8231/EUR and invest at an annualised 288-day interest rate of 6.1% in Europe. If interest rate parity holds, what is the annualised forward premium or discount that the Euro should trade at (relative to the Australian dollar) in the 288-day forward market? Assume one year equals 360 days.

Answer rating: 100% (QA)

To determine the annualised forward premium or discount of the Euro relative to the Australian dolla... View the full answer