Forward Rate Premiums Among Maturities
Response to the following problem:
Today, the annualized interest rate in the U.S. is 4% for any debt maturity. The annualized interest rate in Australia is 4% for debt maturities of 3 months or less, is 5% for debt maturities between 3 months and 6 months, and is 6% for debt maturities more than 6 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.