The spot rate on the Canadian dollar is 1.34.Interest rates in Canada are expected to average 3.4 percent while they are anticipated to be 3.9 percent in the U.S.What is the expected exchange rate three years from now?

Question

Quizplus · Accepted Answer

According to the interest rate parity formula, the expected exchange rate three years from now can be calculated as follows:

Expected exchange rate = Spot rate x (1 + Canadian interest rate)^(time) / (1 + U.S. interest rate)^(time)
Expected exchange rate = 1.34 x (1 + 0.034)^3 / (1 + 0.039)^3
Expected exchange rate = 1.34 x 1.1061 / 1.1181
Expected exchange rate = 1.32

Therefore, the expected exchange rate three years from now is C$1.32, which is option B.

The Spot Rate on the Canadian Dollar Is 1