Suppose that the one-year risk-free interest rate is 5% in the United States.The current spot rate is $0.7642/C$ and the one-year forward rate is $0.7834/C$.What must the Canadian one-year risk-free interest rate be in order for interest rate parity to hold?

Question

Quizplus · Accepted Answer

The correct answer is 2.43%.You get this answer by applying the interest rate parity formula to the information given.The formula is ($0.7834/C$)/ ($0.7642/C$)= (1.05 / 1 + Canadian rate).Solving this equation yields a one-year risk-free Canadian rate of 2.43%.

Suppose That the One-Year Risk-Free Interest Rate Is 5% in the United