Question

(CO I) 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?

Answer 1

Answer:

U.S. dollar-Canadian dollar exchange rate is $1.5961

Explanation:

given data

1 U.S. dollar = 1.60 Canadian dollars

annualized return = 6%

annualized return = 6.5%

time = 180 day

to find out

what is the U.S. dollar-Canadian dollar exchange rate

solution

we know that 1 U.S. dollar equal to 1.60 Canadian dollars

and

exchange rate for 180 days is

exchange rate = Canadian dollar ×( 1 + canadian interest rate )  / ( 1+ US interest rate)   .....................1

put here all these value

exchange rate = Canadian dollar ×( 1 + canadian interest rate )  / ( 1+ US interest rate)

exchange rate = 1.60 ×( 1 + 0.03 )  / ( 1+ 0.0325)

exchange rate = 1.5961

U.S. dollar-Canadian dollar exchange rate is $1.5961