Assume that you can borrow or lend in the US for 2-years at a 4% (annual)...

  

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Assume that you can borrow or lend in the US for 2-years at a 4% (annual) rate, and assume that you can borrow or lend in Canada at a 6% (annual) rate. Further assume that the current exchange rate is .99 $/C$. What 2-year forward rate would you quote on the Canadian dollar? If UIP holds, what exchange rate do you expect in two years? If expected inflation is 2% annually in the US, what is expected inflation in Canada if PPP holds? On average, do you expect to get higher real returns if you hold US or Canadian dollars for the next two years? (け) Assume that you can borrow or lend in the US for 2-years at a 4% (annual) rate, and assume that you can borrow or lend in Canada at a 6% (annual) rate. Further assume that the current exchange rate is .99 $/C$. What 2-year forward rate would you quote on the Canadian dollar? If UIP holds, what exchange rate do you expect in two years? If expected inflation is 2% annually in the US, what is expected inflation in Canada if PPP holds? On average, do you expect to get higher real returns if you hold US or Canadian dollars for the next two years? (け)

Answer rating: 100% (QA)

Solution Uncovered Interest Rate Parity Interest rate in US ... View the full answer