You observe the following current rates and prices today:

• The spot exchange rate today: AU$4.00 per euro;
• The one-year nominal interest rate on bank deposits in Australia: i($) = 4%;
• The one-year nominal interest rate on bank deposits in Germany: i(euro) = 5%; and
• The one-year forward rate: AU$3.97 per euro.

Explain what will happen to the forward rate, F($/euro), if the current spot exchange rate and the nominal interest rates in the two countries remain the same. The answer should have the change in the demand for or the supply of euros in the forward market, the reason(s) for the change(s), and the exact number for the new forward rate?

Answer rating: 100% (QA)

To determine what will happen to the forward rate Feuro if the current spot exchange rate and nomina... View the full answer