Question

Assume the spot rate on the Canadian dollar is C$1.2648, the risk-free nominal rate in the U.S. is 3.3 percent, and the risk-free nominal rate in Canada is 3.8 percent. What one-year forward rate will create interest rate parity?

Answer 1

The one year forward rate is 1.2709.

Step-by-step explanation:

The spot rate means that you have to pay 1.2648 canadian dollar for each united states dollar.

The rate parity is the future rate that reflects the cost of carrying the underlying asset (in this case, the US dollar), for the period under analysis.

The formula for determinating the one year forward rate is

`Canadian dollar rate * (1 + Canadian Risk free)/(1 + US Risk free)`

So with numbers will be

`1.2648 * (1.038)/(1.033) = 1.2709`