If you are indifferent between investing $1000 for one year in a U.S. Treasury security that has an interest rate of 5% or in a Canadian government security that has an interest rate of 8%, you must be expecting

Question

Quizplus · Accepted Answer

The correct answer is C because if you are indifferent between investing in two securities with different interest rates, you must be expecting the exchange rate between the two currencies to change in a way that offsets the difference in interest rates. In this case, the U.S. dollar is expected to appreciate against the Canadian dollar by 3% during the year, which would offset the higher interest rate on the Canadian government security.

If You Are Indifferent Between Investing $1000 for One Year