If the spot exchange rate for the US/Canadian dollar rate was 1.0150 in 2011 and risk-free...
If the spot exchange rate for the US/Canadian dollar rate was 1.0150 in 2011 and risk-free rate was 3.5% in Canada and 2.5% in US, what would be the expected exchange rate in 2013?
| A. |
-$0.9955 |
|
| B. |
$0.9955 |
|
| C. |
$1.0349 |
|
| D. |
-$1.0349 |
|
| E. |
none |
Homework Answers
|
Spot rate 1 Canadian dollar = $ 1.0150 |
|
Risk free rate in Canada = 3.5% or 0.035 |
|
Risk free rate in US = 2.5% or 0.025 |
|
Expected forward rates after 2 years in 2013 = Spot rate * (1+US interest rate)^2 / (1+ Canada interet rate )^2 |
|
1.0150 * (1+0.025)^2 / (1+0.035)^2 |
| 0.9955 |
|
1 Canadian dollar = $0.9955 |
|
So, exchange rate in 2013 is $0.9955 per Canadian dollar. |
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