The interest rate on a 1-year Canadian security is 8%.The current exchange rate is C$ = US $0.78.The 1-year forward rate is C$ = US $0.76.The return (denominated in U.S.$)that a U.S.investor can earn by investing in the Canadian security is __________.

Question

Quizplus · Accepted Answer

First, let's calculate the future value of the Canadian security after one year using the given interest rate:

FV(C$) = C$(1 + 8%) = C$1.08

Now, let's calculate the future value of C$1 converted into U.S. dollars using the one-year forward rate:

FV(US$) = C$1 × US$0.76/C$1 = US$0.76

Finally, we can calculate the return a U.S. investor can earn by investing in the Canadian security using the following formula:

Return(US$) = (FV(US$) / Spot rate) - 1 = (0.76 / 0.78) - 1 = 0.0256

Therefore, the return (denominated in U.S. dollars) that a U.S. investor can earn by investing in the Canadian security is 2.56%, which is closest to choice C (5.23%).

The Interest Rate on a 1-Year Canadian Security Is 8