Question

Suppose that the spot rate on the Canadian dollar is C$1.40. The risk-free nominal rate in the U.S. is 8 percent while it is only 4 percent in Canada. Which one of the following one-year forward rates best establishes the approximate interest rate parity condition?

a. C$1.355.
b. C$1.344.
c. C$1.278.
d. C$1.456.

Answer 1

b. C$1.344.

Step-by-step explanation:

Calculation to determine Which one of the following one-year forward rates best establishes the approximate interest rate parity condition

One-year forward rates =C$1.40 *[1 + (.04 - .08)]^1

One-year forward rates= C$1.344

Therefore the following one-year forward rates that best establishes the approximate interest rate parity condition is C$1.344