You have the following information:
$\begin{array}{ll}
\text { today's spot } & \$ .6850 / \mathrm{CS} \
6 \text { months forward rate } & \$ .7100 / \mathrm{C \$}
\end{array}$
expected inflation rate in the U.S.: $ 4 \% $ p.a.
expected inflation rate in Canada: $ 2 \% $ p.a.
nominal interest rate in the U.S: $ 6 \% $ p.a. You are asked to forecast the spot exchange rate between the Canadian dollar and the U.S.dollar in six months.
a)What is your forecast based on purchasing power parity?
b)What is your forecast based on the forward expectations parity?
c)Based on the Fisher effect,what should be the real interest rate in Canada?
d)Why are the two forecasts in a and b different?

Question

You have the following information:
 $\begin{array}{ll}
\text { today's spot } & \$ .6850 / \mathrm{CS} \
6 \text { months forward rate } & \$ .7100 / \mathrm{C \$}
\end{array}$
expected inflation rate in the U.S.: $ 4 \% $ p.a.
 expected inflation rate in Canada: $ 2 \% $ p.a.
 nominal interest rate in the U.S: $ 6 \% $ p.a. You are asked to forecast the spot exchange rate between the Canadian dollar and the U.S.dollar in six months.
a)What is your forecast based on purchasing power parity?
b)What is your forecast based on the forward expectations parity?
c)Based on the Fisher effect,what should be the real interest rate in Canada?
d)Why are the two forecasts in a and b different?

Quizplus · Accepted Answer

The Answer of You have the following information:
 $\begin{array}{ll}
\text { today's spot } & \$ .6850 / \mathrm{CS} \
6 \text { months forward rate } & \$ .7100 / \mathrm{C \$}
\end{array}$
expected inflation rate in the U.S.: $ 4 \% $ p.a.
 expected inflation rate in Canada: $ 2 \% $ p.a.
 nominal interest rate in the U.S: $ 6 \% $ p.a. You are asked to forecast the spot exchange rate between the Canadian dollar and the U.S.dollar in six months.
a)What is your forecast based on purchasing power parity?
b)What is your forecast based on the forward expectations parity?
c)Based on the Fisher effect,what should be the real interest rate in Canada?
d)Why are the two forecasts in a and b different?

You Have the Following Information today’s spot $.6850/CS6 months forward rate $.7100/C$\begin{array}{ll}\text { today's spot } & \$ .6850 / \mathrm{CS} \\6 \text { months forward rate } & \$ .7100 / \mathrm{C \$}\end{array} today’s spot 6 months forward rate ​$.6850/CS$.7100/C$​

You Have the Following Information $\begin{array}{ll}\text { today's spot } & \$ .6850 / \mathrm{CS} \\6 \text { months forward rate } & \$ .7100 / \mathrm{C \$}\end{array}$