Textbook Problem

Forward Rate Premiums among Maturities Today, the annualized interest rate in the United States is 4 percent for any debt maturity. The annualized interest rate in Australia is 4 percent for debt maturities of three months or less, 5 percent for debt maturities between three months and six months, and 6 percent for debt maturities more than six months. Assume that interest rate parity exists. Does the forward rate quoted today for the Australian dollar exhibit a premium or a discount, or does your answer vary with specific conditions? Briefly explain.