Question

Assume that the Canadian inflation rate is expected to exceed the U.S. inflation rate over the next year. If interest rate parity and the international Fisher effect theories hold, then the one-year forward rate of the Canadian dollar will exhibit a _______, and the spot rate of the Canadian dollar will _____________ over the next year.

Answer 1

Options:

a. premium; depreciate

b. premium; appreciate

c. discount; depreciate

d. discount; appreciate

Answer:C. Discount; Depreciate

Explanation: Inflation is the general increase in the price of goods and services in an economy over a given period of time.

Interest rate parity is a concept there tends to show that their is a strong relationships between interest rate and currency exchange. With interest rate parity one can predict the change in exchange rate between two Countries.

International fisher effect theory tends to suggest that by looking at the interest rate of two currency one can predict the exchange rate disparity between both currency.