Suppose that the spot rate on the U.S. dollar is C$.91. The risk-free nominal rate in the U.S. is 8 % while it is only 4 % in Canada. Which one of the following one-year forward rates best establishes the approximate interest rate parity condition?

Question

Quizplus · Accepted Answer

The interest rate parity condition suggests that the forward rate should adjust to offset the interest rate differential between two countries, preventing arbitrage. The formula to calculate the forward rate based on interest rate parity is: Forward Rate = Spot Rate * (1 + Interest Rate Domestic) / (1 + Interest Rate Foreign). Plugging in the given values: Forward Rate = 0.91 * (1 + 0.08) / (1 + 0.04) = 0.91 * 1.08 / 1.04 ≈ 0.8736.

Suppose That the Spot Rate on the U