The spot rate on the Canadian dollar is 1.15.Interest rates in Canada are expected to average 3.2 percent while they are anticipated to be 3.6 percent in the U.S.What is the expected exchange rate three years from now?

Question

Quizplus · Accepted Answer

To calculate the future exchange rate, we can use the interest rate parity formula:

(1 + Canadian interest rate) / (1 + US interest rate) = (Future spot rate) / (Current spot rate)

Plugging in the values given:

(1 + 0.032) / (1 + 0.036) = (Future spot rate) / 1.15

Future spot rate = 1.1363

Therefore, the expected exchange rate three years from now is C$1.1363.

The Spot Rate on the Canadian Dollar Is 1