Suppose in the spot market 1 U.S. dollar equals 1.5 Canadian dollars. 6-month Ca

Question

Suppose in the spot market 1 U.S. dollar equals 1.5 Canadian dollars. 6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%). 6-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? In other words, how many Canadian dollars are required to purchase one U.S. dollar in the 180-day forward market?
Answer
a.1.8705
b.1.6610
c.1.5114
d.1.4964
e.1.4366

Explanation / Answer

Not A,B,or C since dollar increases more in value. d.1.4964 is my best guess. 1.5 * 1.09 = 1.635 1 * 1.0975=1.0975 1.635/1.0975=1.4897 Its the closest, don't know why its not exact. Hope this helped, best of luck.

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