Question

Suppose that the spot price of the US dollar is 1 ($/Canadian dollar) and the one-year forward rate is 1.2 ($/Canadian dollar), and the 1-year on US deposits is 5 percent. What would the interest rate have to be in Canada to make you indifferent between putting your money there or here

Answer 1

Answer:

6 percent.

Explanation:

To solve this question, we will take help of the Fisher equation,

Therefore,

(Spot rate/Forward rate) = (interest rate in US/Interest rate in Canada),

(1/1.2) = (0.05/x), Now solving for 'x'.

There fore,

x = (1.2 * 0.05) / 1

x = 0.06.

Hope this clear things up

Thankyou.