Question

a) The value of the US Dollar today is GHS 6.1. Yesterday, the value of the US dollar was

GHS 5.91. The Ghana Cedi ____ by ____%.

b) Assuming that existing U.S. one year interest rate is 8% and the Canadian one-year

interest rate is 9%. Also assume that interest rate parity exists. Should the forward rate

of the Canadian dollar exhibit a discount or a premium? If U.S. investors attempt

covered interest arbitrage, what will be their return? If Canadian investors attempt

covered interest arbitrage what will be their return?

Answer 1

a. We take the current exchange minus the previous one which is 6.1− 5.91= 0.91.To get percentage we take the difference then divide by the previous exchange rate and multiply by 100%

$=$ $\frac {0.91}{5.91}×100$ $=$ 3.2%

b. The Canadian dollars forward rate should exhibit a discount because its interest rate exceeds the US interest rate.

c.U.S investors would earn a return of 8% using covered interest arbitrage , the same as they would earn in the U.S

d.Canadian investors would earn a return of 9% using covered arbitrage, the same as they would earn in Canada