Suppose in the spot market 1 U.S. dollar equals 1.60 Canadian dollars. Six-month
ID: 2627415 • Letter: S
Question
Suppose in the spot market 1 U.S. dollar equals 1.60 Canadian dollars. Six-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%). Six-month U.S. securities have an annualized return of 6.5% and a periodic return of 3.25%. If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the 180-day forward market?
please should the answer below:
(a) 1 U.S. dollar = 0.6235 Canadian dollars
(b) 1 U.S. dollar = 0.6265 Canadian dollars
(c) 1 U.S. dollar = 1.0000 Canadian dollars
(d) 1 U.S. dollar = 1.5961 Canadian dollars
(e) 1 U.S. dollar = 1.6039 Canadian dollars
Explanation / Answer
Canadian dollar/ USD = 1.60
180 day forward market exchange rate = CAD (1+CAD interestrate)/(1+USD interest rate)
180 day forward market exchange rate = 1.60 (1+0.03)/(1+0.0325) = $1.5961 answer
Answer is (d) 1 U.S. dollar = 1.5961 Canadian dollars