If one-year U.S. nominal interest rates are 4%, one year Canadian nominal interest rates are 7.5%, and the current spot exchange rate, S₀, is $0.587, then what will the expected spot rate be in one year?

Question

Quizplus · Accepted Answer

The expected spot rate in one year is $0.568. This is because the expected change in the spot rate is equal to the difference between the two countries' nominal interest rates, which is 7.5% - 4% = 3.5%. The expected spot rate is therefore $0.587 * (1 + 3.5%) = $0.568.

If One-Year U