If the covered interest parity holds, the spot rate of U

Finance Dec 26, 2020

If the covered interest parity holds, the spot rate of U.S. dollars for Canadian dollars was $1.05/C$1. Since that time the interest rate in the U.S. has been 6% greater than that in Canada. then what is the forward exchange rate? Show your work.

Expert Solution

Forward exchange rate (USD/C) = Spot exchange rate * [(1+ Interest rate for USD) / (1+ Interest rate for C)]

= 1.05* [(1+6%)/(1)]

= 1.05*1.06

= 1.113

So, The Forward exchange rate is 1.113

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