Suppose in the spot market 1 U.S.dollar equals 1.5500 Canadian dollars.6-month Canadian securities have an annualized return of 6.00% (and thus a 6-month periodic return of 3.00%).6-month U.S.securities have an annualized return of 6.50% and a periodic return of 3.25%.If interest rate parity holds,what is the U.S.dollar-Canadian dollar exchange rate in the 180-day forward market? In other words,how many Canadian dollars are required to purchase one U.S.dollar in the 180-day forward market? Do not round the intermediate calculations and round the final answer to four decimal places.
A) 1.9019
B) 1.5308
C) 1.2525
D) 1.5462
E) 1.1597

Question

Quizplus · Accepted Answer

According to interest rate parity, the forward exchange rate should equal the spot exchange rate times the ratio of the two countries' interest rates.
 
Therefore,

(1 + 3.25%/2)/(1 + 6.00%/2) = Forward rate/Spot rate
 
Solving for the forward rate, we get:

Forward rate = Spot rate x (1 + 3.25%/2)/(1 + 6.00%/2)
 
Plugging in the given spot rate:

Forward rate = 1.5500 x (1 + 3.25%/2)/(1 + 6.00%/2) = 1.5462
 
Therefore, the Canadian dollar- U.S. dollar exchange rate in the 180-day forward market is 1.5462 or it requires 1.5462 Canadian dollars to purchase one U.S. dollar in the forward market.

Suppose in the Spot Market 1 U