Assume a risk-free asset in the U.S.is currently yielding 2.7 percent while a Canadian risk-free asset is yielding 2.8 percent and the current spot rate is Can$1.2849 = $1.What is the approximate 6-month forward rate if interest rate parity holds?

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Quizplus · Accepted Answer

To find the 6-month forward rate under the interest rate parity condition, we use the formula: Forward Rate = Spot Rate * (1 + interest rate of domestic country) / (1 + interest rate of foreign country). Here, the domestic country is the U.S. and the foreign country is Canada. The interest rates are annual, so for 6 months, we divide them by 2. Thus, Forward Rate = 1.2849 * (1 + 0.027/2) / (1 + 0.028/2) = 1.2849 * (1.0135) / (1.014) ≈ Can$1.2855.

Assume a Risk-Free Asset in the U