Assume that U.S. interest rate for the next three years is 5%, 6%, and 7% respectively. Also assume that Canadian interest rates for the next three years are 3%, 6%, 9%. The current Canadian spot rate is $.840. What is the approximate three-year forecast of Canadian dollar spot rate if the three-year forward rate is used as a forecast?
A) $.840
B) $.890
C) $.856
D) $.854

Question

Quizplus · Accepted Answer

SOLUTION:
{[(1.05)(1.06)(1.07)]/[(1.03)(1.05)(1.08)]} × $.84 = $.856

Assume That U