Suppose in the spot market 1 U.S.dollar equals 1.3750 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.

Question

Quizplus · Accepted Answer

Interest rate parity implies that the forward exchange rate should adjust to offset the interest rate differential between two countries. Using the formula: Forward Rate = Spot Rate * (1 + Interest Rate Domestic) / (1 + Interest Rate Foreign), we get 1.3750 * (1 + 0.0325) / (1 + 0.0300) = 1.3717.

Suppose in the Spot Market 1 U