Suppose you observe the following spot and forward exchange rates between the U.

Question

Suppose you observe the following spot and forward exchange rates between the U.S. and Canadian dollars: The current 1-year interest rate on U.S. Treasury securities is 7.55%. If interest rate parity holds, what is the expected yield on 1-year Canadian securities of equal risk? 4.65% 4.97% 5.23% 7.55% 9.92% Which of the following statements is implied by interest rate parity? Interest rates in all countries should be the same. Interest rates for all countries with the same political risk should be the same. An investment in the home country should have the same return as a similar investment in a foreign country. If two countries have the same inflation rate, they should have the same interest rate, too. A product bought in one country should have the same price in other countries, adjusted for exchange rate.

Explanation / Answer

An investment in the home country should have the same return as a similar investment in a foreign country.

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