Question

You can borrow and lend at the interest rates of 7.00% in the US and 5.00% in Canada. Based on Interest Rate Parity, the forward premium for CAD should be exactly equal to: Group of answer choices 1.90% - 1.87% 1.02% 98.11%

Answer 1

Answer:

1.90%

Explanation:

Note that that CAD exchange rate would be in terms of how many US dollars can be exchanged for 1 CAD, which means that the formula for forward premium would be stated in terms of US dollars, I mean the US$ as the numerator and CAD's interest rate would be the denominator

the forward premium for CAD=((1+US interest rate)/(1+Canada interest rate))-1

the forward premium for CAD=((1+7%)/(1+5%))-1

the forward premium for CAD=1.90%