Interest Parity

Suppose investors can choose any country in which to invest and that every

Question

# Question #4 Interest Parity

Suppose investors can choose any country in which to invest and that every

investor in a particular country

earns the same interest rate on investment. Consider the case of an investor deciding between putting

money in the USA or India (currency is called rupee, its symbol is |).

a) If the spot exchange rate is 66.845|/$, interest in the USA is at an annual rate of i$=4%,

interest in India is i|=6%, then would you expect the forward rate one year from now to be more or

fewer rupees per dollar?

b) How many rupees would you expect a dollar to be worth on the spot market in one year

from now?

c) What would a profit seeking arbitrager do if the actual 12-month forward rate was $0.016/|?

Economics