The interest rate on Euro-denominated assets maturing in one year is 10% and the interest rate on
Question:
The interest rate on Euro-denominated assets maturing in one year is 10% and the interest rate on comparable Canadian dollar-denominated assets is 8%.
Consider two possible expectations for the spot exchange rate between the Canadian dollar and the Euro (Canadian dollars per one Euro) in one year: (1). the spot rate will fall by 5 Canadian cents (Canadian dollars per one Euro will fall by 0.05 in a year) or (2). the spot rate will rise by 3 Canadian cents (Canadian dollars per one Euro will rise by 0.03)?
Requirment:
A. Determine the current equilibrium spot rate under each scenario and explain which expectation for the future spot rate makes sense?
B. Suppose interest rates are as given initially (10% and 8%) and the current spot rate Canadian dollars per one Euro is 2. So calculate the forward discount or forward premium?