Assume a risk-free asset in the U.S. is currently yielding 4.1 percent, a Canadian risk-free asset is yielding 3.7 percent, and the current spot rate is C$1.2633. What is the approximate three-year forward rate if interest rate parity holds?

Question

Quizplus · Accepted Answer

The correct answer is A because the forward rate is calculated as the spot rate multiplied by the ratio of the foreign risk-free rate to the domestic risk-free rate. In this case, the forward rate is C$1.2633 * (1 + 0.037) / (1 + 0.041) = C$1.2482.

Assume a Risk-Free Asset in the U