(co i) suppose in the spot market 1 u. s. dollar equals 1.60 canadian dollars. six month canadian securities have an annualized return of 6% (and thus a 6-month periodic return of 3%). six month u. s. securities have an annualized return of 6.5% and a periodic return of 3.25%. if interest rate parity holds, what is the u. s. dollar-canadian dollar exchange rate in the 180 - day forward market?

U.S. dollar-Canadian dollar exchange rate is $1.5961

Explanation:

given data

1 U.S. dollar = 1.60 Canadian dollars

annualized return = 6%

annualized return = 6.5%

time = 180 day

to find out

what is the U.S. dollar-Canadian dollar exchange rate

solution

we know that 1 U.S. dollar equal to 1.60 Canadian dollars

and

exchange rate for 180 days is

exchange rate = Canadian dollar ×( 1 + canadian interest rate )  / ( 1+ US interest rate)   1

put here all these value

exchange rate = Canadian dollar ×( 1 + canadian interest rate )  / ( 1+ US interest rate)

exchange rate = 1.60 ×( 1 + 0.03 )  / ( 1+ 0.0325)

exchange rate = 1.5961

U.S. dollar-Canadian dollar exchange rate is $1.5961

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