The Canadian interest rate is greater than the US interest rate, therefore, the forward rate of the Canadian dollar should display a discount.
b) The return for the US investors would be 10 percent, following the covered interest arbitrage phenomena the interest would remain same as the investors would earn in the US.
c) Similarly, Canadian investors would also earn an interest rate of 11 percent.
26. a) Forward rate premium = [0.08 – 0.14] / 0.14 = 0.4285
b) 1-year forward rate of peso = [0.10 – 0.14] / 0.14= 0.28571
c) Change in spot rate = [1 + 0.1] / [1 + 0.02] = 1.0784 – 0.14 = 0.9384
d) Spot rate in 1 year = as per IFE the spot rate for 1 year would be 1.0784 as above
e) as the spot rate changes in the preceding year, ot would increase accordingly in the subsequent year.
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