Suppose that the spot price of the US dollar is 1 ($/Canadian dollar) and the one-year forward rate is 1.2 ($/Canadian dollar),

Question

3 years ago

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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

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1 answer:

natima [27] · Answer 1 · 2022-07-07T01:04:16+03:00

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.