Question

27. o 28. O 29. 0 30. 0 Suppose in the spot market 1 U.S. dollar equals 1.3750 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? Do not round the intermediate calculations and round the final answer to four decimal places. O a. 1.2345 O b. 1.3717 O c. 1.4540 O d. 1.1660 o o o o

Answer 1

computation of forward market rate as per Anterest parity theorm Spot rate" 1$ = 1.3750 canadian & Interest rate for canadian t-3 401 (for months) Interest rate for Us $ - 3025% for 6 months) we have to compound the above rates with respective currency 1 C1:0325) = 1.3750 (1:03) 1$ after six months. = 1.3750 (1.03) (1.0325) = 1.3717 1$ i forward rate 1 $ = 13717