FIU/BPMEZ International Finance

EXAMPLE SERIES NO. 4
INTEREST PARITY
1. In December, the current interest rate on AUD is 4.75% p.a. and on EUR 1.00% p.a. The
current exchange rate is 1.3719 AUD/EUR.



Write the essence of uncovered interest parity and apply it to the given
currencies and situation.
Determine, under the uncovered interest parity condition, the exchange rate
expected for the year

2. The current exchange rate is 21.80 CZK/USD. The annual interest rate on CZK is 6.75%
p.a. and on USD 3.25% p.a. Determine what should happen to interest rates on CZK if
the exchange rate is expected to be 22.40 CZK/USD in a year.

3. Calculate the 6-month CAD/USD exchange rate if the following spot rates and interest
rates are quoted.
CAD/USD
andCAD (p.a.)
andUSD (p.a.)

1,0131
3,875
2,275

1,0145
4
2,875

4. The following spot and forward foreign exchange rates and interest rates are quoted.
Determine whether there is a covered interest arbitrage opportunity under the given
conditions if the investment period is 30 days.
CHF/USD spot
CHF/USD forward
andCHF (p.a.)
andUSD (p.a.)

1,2819
1,2785
1,75 %
4,87 %

1,2829
1,2797
1,88 %
4,99 %

5. The bank is offered a 6-month term deposit of CZK 10 million. SEK 6 MILLION. It is Friday
04/06/2022, the six months run from Monday 07/06/2022 to Monday 06/12/2022 (i.e.
183 days). The Bank has no commercial use for SEK and therefore places the funds in the
euro currency market, but in USD, as the dollar market is the largest and most liquid
segment of the euro currency markets. The bank must determine the interest rate for the
SEK deposit from the given Eurodollar rates and the SEK/USD swap rate. Calculate what
interest rate the bank will offer.

FIU/BPMEZ International Finance

andUSD (p.a.)

2,75 %

2,88 %

SEK/USD spot
Swap 6m

6,6276
458

6,6298
488