Suppose that the three-month interest rate in Australia is 2 percent and it equals 4 percent in the United States. Suppose further that the three-month forward rate ($/$) on the Australian dollar (A$) is $1.01 and the spot rate $/$ = $1.00/$. Does covered interest rate parity hold in this case? If not, what would arbitragers do? [USA: home country, Australia: foreign country]. [5 MARKS]
Suppose that the three-month interest rate in Australia is 2 percent and it equals 4 percent in the United States.
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