Question

If annual interest rates in the U.S. and Canada are 9% and 13%, respectively, and the spot value of the Canadian dollar is USD 0.9120 / CAD, then the 6-month forward rate should be ___ for interest rate parity to hold.

Answer 1

6 month interest rates for US = 9*6/2 =4.5%

6 month interest rates for Canada = 13*6/12 = 6.5%

Forward rate = Spot rate (1+iUS)/(1+i CAD)

                 = .9120(1+.045)/(1+.065)

                 = .9120 * 1.045/1.065

                 = $ .89487 /CAD