8006 Exam Dumps | The spot exchange rate between USD and AUD is 0.70. The risk free interest rates in the US and Australia

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Exam I: Finance Theory Financial Instruments Financial Markets - 2015 Edition
PRMIA.8006.v2021-04-25.q101
Question 69

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Question 69/101

The spot exchange rate between USD and AUD is 0.70. The risk free interest rates in the US and Australia are
2% and 3.5% respectively. What is the forward exchange rate between the two currencies one year hence?

A. 0.7103

B. 0.6899

C. 1.4495

D. 1.4079

Correct Answer: B

Explanation
Forward currency rates can be calculated as Spot rate x (1 + rate in domestic currency)/(1 + rate in foreign currency), where the spot rate is the 'direct' rate. Direct rates are rates that are expressed as the number of domestic currency units that it takes to buy 1 unit of the foreign currency. In this case, considering the US the domestic currency, then the forward rate is given by 0.7 * 1.02/1.035 = 0.6899. Therefore Choice 'b' is the correct answer.

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