Question #33365

Suppose 1 U.S. dollar equals 1.60 Canadian dollars in the spot market. 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?

Expert's answer

1 U.S. dollar = 1.5961 Canadian dollars

The difference between securities return for 6 month is (3.25% - 3%) = 0.25%

So, the exchange rate will be: 1.6*0.9975 = 1.5961

The difference between securities return for 6 month is (3.25% - 3%) = 0.25%

So, the exchange rate will be: 1.6*0.9975 = 1.5961

## Comments

Assignment Expert11.12.13, 16:34100%-0.25%=99,75% or 0,9975

Hector04.12.13, 02:10How do you get the 0.9975?

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