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International Finance: Exchange Rate in the Forward Market

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In the spot market, 1 U.S. dollar equals 1.68 Canadian dollars. Six month Canadian securities have an annual return of 12%. Six month U.S. securities have an annualized return of 7.5%. If interest rate parity holds, what is the U.S. dollar-Canadian dollar exchange rate in the 180-day forward market?

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Canadian: 12% / 2 = 6% because six months is one-halve of a 360-day year.
U.S.: 7.5% / 2 = ...

Solution Summary

This solution is comprised of exchange rate calculation. The exchange rate in the forward market is determined.

$2.19
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International Finance Multiple Choice Questions

International Finance Multiple Choice

1. If interest rate parity exists and transactions costs are zero, foreign financing with a simultaneous forward purchase of the currency borrowed will result in an effective financing rate that is:

a. Less than the domestic interest rate.

b. Greater than the domestic interest rate.

c. Equal to the domestic interest rate.

d. Greater than the domestic interest rate if the forward rate exhibits a premium and less than the domestic interest rate if the forward rate exhibits a discount.

2. To force the value of the British pound to depreciate against the dollar, the Federal Reserve should:

a. Sell dollars for pounds in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.

b. Sell pounds for dollars in the foreign exchange market and the Bank of England should sell dollars for pounds in the foreign exchange market.

c. Sell pounds for dollars in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.

d. Sell dollars for pounds in the foreign exchange market and the Bank of England should sell pounds for dollars in the foreign exchange market.

3. A firm sells a currency futures contract, and then decides before the settlement date that it no longer wants to maintain such a position. It can close out its position by:

a. Buying an identical futures contract.

b. Selling an identical futures contract.

c. Buying a futures contract with a different settlement date.

d. Selling a futures contract for a different amount of currency.

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