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QUESTION 3 The interest rate in the Sri Lanka is 12
QUESTION 3 The interest rate in the Sri Lanka is 12.5%. The interest rate in the Australia is 1.5%. The spot rate for the Sri Lankan Rupee is A$0.0082. According to the international Fisher effect (IFE), the Sri Lankan Rupee should adjust to a new level of: A. A$0.0074. B. A$0.0083. O C. A$0.0092. D. A$0.0091. O E. A$0.0082.
Assume the following bid and ask rates of the pound for two banks as shown below: Bid Ask Sampath Bank in Sri Lanka Rs. 120.15 Rs. 121.42 ANZ in Australia Rs. 118.50||Rs. 120.25 What is the arbitrage profit per Australian dollar?
Expert Solution
Question 3:-
Sri Lanka Interest Rate = 12.50%
Australia Interest Rate = 1.50%
Australia dollar / Sri Lankan rupee = $ 0.0082
Let us discuss:- Why interest rate high or low in the countries?
If there is low demand of borrowings then interest rate will be less or nil on savings and minium rate for borrowings. Why low demand of borrowings? because every countrymen has sufficient money for its necessity goods, so that country economy will be bear less inflation rate as compared to other country in which interest rates high.
So, Australia will face less inflation than Sri Lanka, this will effect purchasing power of countries people, so purchasing power of Australia is high than Sri Lanka. Demand of Australia dollar will be good in future, so Australia dollar will be traded at high price and vice versa.
Interest rate difference = 12.50 - 1.50 = 11%
So Dollar/Sri-Lanka rupee = 0.0082/ 1.110 = $ 0.0074
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