Suppose 1 U.S. dollar equals 1.60 Canadian dollars in the spot market. 6-month Canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%). 6-month U.S. securities have an annualized return of 6.5% 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?
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Expert's answer
2013-07-31T09:39:55-0400
1 U.S. dollar = 1.5961 Canadian dollars The difference between securities return for 6 month is (3.25% - 3%) = 0.25% So, the exchange rate will be: 1.6*0.9975 = 1.5961
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Comments
100%-0.25%=99,75% or 0,9975
How do you get the 0.9975?
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