Assume that U.S. interest rate for the next three years is 5%, 6%, and 7% respec

Question

Assume that U.S. interest rate for the next three years is 5%, 6%, and 7% respectively. Also assume that Canadian interest rates for the next three years are 3%, 5%, 8%. The current Canadian spot rate is $.840. What is the approximate three-year forecast of Canadian dollar spot rate if the three-year forward rate is used as a forecast?

a.
3%

b.
2%

c.
4%

d.
6%

Assume that U.S. interest rate for the next three years is 5%, 6%, and 7% respectively. Also assume that Canadian interest rates for the next three years are 3%, 5%, 8%. The current Canadian spot rate is $.840. What is the approximate three-year forecast of Canadian dollar spot rate if the three-year forward rate is used as a forecast?

a.
$.856

b.
$.854

c.
$.840

d.
$.890

Explanation / Answer

Ans is A 856

Interest rate of home currenc divided by interest rate of candian

{[(1.05)(1.06)(1.07)]/[(1.03)(1.05)(1.08)]}* $.84

(1.19091/1.16802)*840 =856

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