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Homework answers / question archive / What would be 2-months forward quote on AUD/USD if the spot rate is USD/AUD 1

What would be 2-months forward quote on AUD/USD if the spot rate is USD/AUD 1

Finance

What would be 2-months forward quote on AUD/USD if the spot rate is USD/AUD 1.4134-38. Base currency (USD) bid and offer interest rates per annum are 2% and 2.2% per annum, whereas terms currency interest rates are 2.5% and 2.8% per annum.

The answer says 0.7064-72, but I don't get that. Is someone able to explain please?

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Spot rate quote of 1 USD = AUD 1.4134 - 1.4138

Forward quote is to be calculated for 1 AUD in terms of USD

spot rate 1 AUD = 1/USD rate

Ask rate = 1/1.4134 =0.7075137965

Bid rate =1/1.4138=0.7073136229

USD lending rate = 2%

USD borrowing rate = 2.2%

AUD lending rate =2.5%

AUD borrowing rate = 2.8%

Time in year = 2/12

Forward Bid rate of AUD = Spot bid rate*(1+USD lending rate or deposit rate*time))/(1+(AUD borrowing rate*time))

=0.7073136229*(1+(2%*2/12))/(1+(2.8%*2/12))

=0.7063749187 or $0.7064

Forward Ask rate of AUD = Spot Ask rate*(1+USD borrowing rate or deposit rate*time))/(1+(AUD lending rate*time))

=0.7075137965*(1+(2.2%*2/12))/(1+(2.5%*2/12))

=0.7071615075 or $0.7072

So Forward quote of AUD/USD is 0.7064-72