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Spot exchange rate

You observe the following exchange rates and interest rates:

· In the spot market, 1 EMU euro equals 0.88 U.S. dollar.

· In the spot market, 1 Canadian dollar equals 0.70 EMU euro.

· In the three-month forward market, 1 EMU euro equals 0.75 U.S. dollar.

· In the three-month forward market, 1 EMU euro equals 1.21 Canadian dollars.

· Three-month risk-free Canadian securities have a 6 percent nominal annual interest rate.

Assume that interest rate parity holds, the market is in equilibrium, and that there are no arbitrage opportunities.

What is the spot exchange rate between the U.S. dollar and the Canadian dollar?

$0.62 U.S. = $1 Canadian
$0.76 U.S. = $1 Canadian
$0.80 U.S. = $1 Canadian
$1.25 U.S. = $1 Canadian
$1.32 U.S. = $1 Canadian

Solution Preview

You observe the following exchange rates and interest rates:

? In the spot market, 1 EMU euro equals 0.88 U.S. dollar.

? In the spot market, 1 Canadian dollar equals 0.70 EMU euro.

? In the three-month ...

Solution Summary

The spot exchange rate rate between the U.S. dollar and the Canadian dollar has been calculated using USD/Euro and Euro/CAD spot rates.

$2.19