The current exchange rate between Canada and a foreign country is Fc600 per $1. The nominal risk-free rate in Canada is 5%, while the foreign rate is 28%. What is the only possible forward rate
That could prevail without creating any arbitrage opportunities?

Question

Quizplus · Accepted Answer

To avoid arbitrage, the forward rate must be calculated based on the interest rate parity principle:
Forward Rate = Spot Rate x ((1 + Domestic Interest Rate)/(1 + Foreign Interest Rate))
Using the given information:
Forward Rate = Fc600 per $1 x ((1 + 0.05)/(1 + 0.28)) = Fc731.43 per $1 
Therefore, the correct answer is option D.

The Current Exchange Rate Between Canada and a Foreign Country