Assume the spot rate on the Canadian dollar is C$1.2648, the risk-free nominal rate in the U.S. is 3.3 percent, and the risk-free nominal rate in Canada is 3.8 percent. What one-year forward rate will create interest rate parity?

Question

Quizplus · Accepted Answer

The formula for calculating the forward rate to achieve interest rate parity is: Forward Rate = Spot Rate * (1 + Interest Rate Domestic) / (1 + Interest Rate Foreign). Plugging in the given values: Forward Rate = 1.2648 * (1 + 0.033) / (1 + 0.038) = 1.2648 * 1.033 / 1.038 ≈ C$1.2709.

Assume the Spot Rate on the Canadian Dollar Is C$1