The spot rate for Canadian and U.S.dollars is $0.7213/C$.The annualized interest rate on a six-month government bond in Canada is 6% and the same rate in the United States is 5%.Calculate the 6-month forward rate that is needed for interest rate parity to hold.

Question

Quizplus · Accepted Answer

To calculate the 6-month forward rate you need to use the interest rate parity formula.You need to change the annualized risk-free rates into 6-month risk-free rates to calculate the 6-month forward rate.The interest rate parity formula is (6-month forward rate/$0.7213/C$)= (1.025)/(1.03).This gives you a 6-month forward rate of $0.7178/C$.

The Spot Rate for Canadian and U