As of now, the nominal interest rate is 6% in the U.S. and 6% in Australia. The spot rate of the Australian dollar is $.58, while the one-year forward rate of the Australian dollar exhibits a discount of 2%. Assume that as covered interest arbitrage occurred this morning, the interest rates were not affected, and the spot rate of the Australian dollar was not affected, but the forward rate of the Australian dollar was affected, and consequently interest rate parity now exists. Explain the forces that caused the forward rate of the Australian dollar to change by completing this sentence: The ___________ [Australian or U.S.?] investors could benefit from engaging in covered interest arbitrage; their arbitrage would involve ___________ [buying or selling?] Australia dollars forward, which would cause the forward rate of the Australian dollar to ____________ [increase or decrease?].]
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