Assume That the UK Interest Rate Is 11 Percent, While

question 45

Multiple Choice

Assume that the UK interest rate is 11 percent, while Australia's one-year interest rate is 12 percent. Assume interest rate parity holds. If the one-year forward rate of the Australian dollar was used to forecast the future spot rate, the forecast would reflect an expectation of:

• A) depreciation in the Australian dollar's value over the next year.
• B) appreciation in the Australian dollar's value over the next year.
• C) no change in the Australian dollar's value over the next year.
• D) information on future interest rates is needed to answer this question.

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Definitions:

Depreciation

The accounting method of allocating the cost of a tangible asset over its useful life, reflecting wear and tear, deterioration, or obsolescence.

Interest Expense

The cost incurred by an entity for borrowed funds over a period of time, typically expressed as an annual rate.

Cash Coverage Ratio

A financial metric that measures a company’s ability to cover its debt obligations with its operating cash flow.

Total Asset

The sum of all assets owned by a company, including both current and non-current assets.