Question

Suppose 1 U.S. dollar equals 1.55 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? Enter your answer rounded to four decimal places. For example, if your answer is 12.34567 then enter as 12.3457 in the answer box.

Answer #1

**A)** we
can compute the justified forward C$ / $ from the following formula
**:-**

**Justified forward rate = spot rate*(1+t*iC$) /
(1+t*i$)**

where t=period= 6 months

i$ =
6.5%*6 / 12 =**3.25%**

spot rate = C$1.55/ $

iC$ =
6%*6 / 12 =**3%**

**Note :-180 day
is treated as 6 month**

**= spot rate*(1+t*iC$) / (1+t*i$)**

**= 1.55 *
(1+(6/12)*0.06) / (1+(6/12)*0.065**

**= 1.55*1.03 /
1.0325**

**180 day forward rate =
1.5462**

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