Nominal Rate Comparison in Canada and U.S.
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Suppose the nominal interest rate in the US is 7.5% and US inflation is 3.5%. Also the Canadian dollar spot rate is 0.8574 and the Japanese yen spot rate is 0.00688. Finally, the 90-day forward rate for the Canadian dollar is 0.8493 and for the Japanese yen is 0.00700.
Suppose the nominal 90 day US interest rate is 1.875%. Then Canadians nominal 90-day interest rate is approximately:
a. 1.7%
b. 5.9%
c. 0.87%
d. 2.8%
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Solution Summary
Four step process shown for you and computations done by hand.
Solution Preview
The nominal interest rate should be such that there is no arbitrage opportunity.
Suppose we borrow 1 CAD
Step 1: convert it into US$ and receive US$0.8574. ...
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