The present exchange rate is C$= U.S.$1.05.The one year future rate is C$= U.S.$1.04.The yield on a 1-year U.S.bill is 3%.A yield of __________ on a 1-year __________ Canadian bill will make investor indifferent between investing in the U.S.bill and the Canadian bill.

Question

Quizplus · Accepted Answer

The investor's return on investing in the U.S. bill is:
3% * (1+1.05) = 3.15%
This return can be converted to Canadian dollars at the current exchange rate:
3.15% / 1.05 = 3%
Therefore, to be indifferent between the U.S. bill and a Canadian bill, the investor must earn at least a 3% return in Canada. We can set up the following equation to solve for the required yield on a Canadian bill:
(1 + x) * 1.04 = 1.05
Solving for x:
x = (1.05/1.04) - 1 = 0.96%
Therefore, the investor must earn a yield of at least 0.96% on a 1-year Canadian bill to be indifferent between investing in the U.S. bill and the Canadian bill. Converted to an annual yield, this is 0.96% * 1.05 = 1.02%. So, the answer is C) 2.02%.

The Present Exchange Rate Is C$= U