The present exchange rate is C$ = U.S.$0.78.The 1-year future rate is C$ = U.S.$0.75.The yield on a 1-year U.S.bill is 5%.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

To find the yield on the Canadian bill that makes an investor indifferent, we use the formula for covered interest rate parity: (1 + i_C) = (1 + i_U) * (F/S), where i_C is the Canadian yield, i_U is the U.S. yield (5% or 0.05), F is the future exchange rate (0.75), and S is the spot exchange rate (0.78). Solving for i_C gives approximately 9.2%.

The Present Exchange Rate Is C$ = U