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Hi sir how do i do the following question?
Qn: The following exchange rates of UK sterling against the Australian dollar (A$) have been quoted.
Spot £1 = A$1.7574
Six months forward £1 = A$1.7245The interest rate in Australia is 5% per year for a six-month deposit or borrowing .
What is the annual interest rate for a six-month deposit or borrowing in the UK?
Answer : 8.90%
I used the interest rate parity formula, but my answer was 7%.
Does not the answer book show the workings? (If not then you should be using one of the ACCA approved publishers books).
Forward rate = spot rate x (1.0.25/1+UK six month rate)
If you solve this, and then multiply the UK six month rate by 2, then you come to 8.90%
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