Suppose you observe the following spot and forward exchange rates between the U.S. dollar ($) and the Canadian dollar (C$): One-Year Forward Spot Exchange Rate Exchange Rate Canadian dollar (U.S. dollar/Canadian dollar) 0.8932 0.9133 The current one-year interest rate on U.S. Treasury securities is 8.03%. If interest rate parity holds, what is the expected yield on one-year Canadian securities of equal risk? 6.22% 5.65% 4.80% 4.52% Which of the following statements is implied by interest rate parity theory? Interest rates in all countries with the same political risk should be the same. Interest rates in all countries should be the same. An investment in one's home country should have the same return as a similar investment in a foreign country. O If two countries have the same inflation rate, they should have the same interest rate, too.
Suppose you observe the following spot and forward exchange rates between the U.S. dollar ($) and the Canadian dollar (C$): One-Year Forward Spot Exchange Rate Exchange Rate Canadian dollar (U.S. dollar/Canadian dollar) 0.8932 0.9133 The current one-year interest rate on U.S. Treasury securities is 8.03%. If interest rate parity holds, what is the expected yield on one-year Canadian securities of equal risk? 6.22% 5.65% 4.80% 4.52% Which of the following statements is implied by interest rate parity theory? Interest rates in all countries with the same political risk should be the same. Interest rates in all countries should be the same. An investment in one's home country should have the same return as a similar investment in a foreign country. O If two countries have the same inflation rate, they should have the same interest rate, too.
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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Transcribed Image Text:Suppose you observe the following spot and forward exchange rates between the U.S. dollar ($) and the Canadian dollar (C$):
| | Spot Exchange Rate | One-Year Forward Exchange Rate |
|-------------------|--------------------|-------------------------------|
| Canadian dollar (U.S. dollar/Canadian dollar) | 0.8932 | 0.9133 |
The current one-year interest rate on U.S. Treasury securities is 8.03%. If interest rate parity holds, what is the expected yield on one-year Canadian securities of equal risk?
- 6.22%
- 5.65%
- 4.80%
- 4.52%
Which of the following statements is implied by interest rate parity theory?
- Interest rates in all countries with the same political risk should be the same.
- Interest rates in all countries should be the same.
- An investment in one’s home country should have the same return as a similar investment in a foreign country.
- If two countries have the same inflation rate, they should have the same interest rate, too.
![# 5. Interest Rate Parity
The rise of globalization is due to the many companies that have become multinational corporations for various reasons—for example, to access better technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk. This multimarket presence exposes companies to different kinds of risk as well—for example, political risk and exchange rate risk.
Several factors affect the exchange rate of a currency with another currency. Which of the following statements are true about the factors that have an impact on exchange rates? Check all that apply.
- [ ] When a government limits imports and restricts foreign exchange transactions, its currency’s value tends to increase relative to other currencies.
- [ ] If the demand for a currency increases, the currency’s value will increase relative to other currencies.
- [ ] If a government intends to prevent its currency’s value from falling relative to other currencies, it will purchase its currency from sellers in the market.
- [ ] An increase in inflation tends to increase the currency’s value with respect to other currencies with lower inflation.
The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following:
Suppose you observe the following spot and forward exchange rates between the U.S. dollar ($) and the Canadian dollar (C$):](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F8e241797-399b-4dac-ab9c-2b3b625a3d13%2F45370276-00af-4008-8b36-e7c1aaa2d586%2F7umcrzk_processed.png&w=3840&q=75)
Transcribed Image Text:# 5. Interest Rate Parity
The rise of globalization is due to the many companies that have become multinational corporations for various reasons—for example, to access better technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk. This multimarket presence exposes companies to different kinds of risk as well—for example, political risk and exchange rate risk.
Several factors affect the exchange rate of a currency with another currency. Which of the following statements are true about the factors that have an impact on exchange rates? Check all that apply.
- [ ] When a government limits imports and restricts foreign exchange transactions, its currency’s value tends to increase relative to other currencies.
- [ ] If the demand for a currency increases, the currency’s value will increase relative to other currencies.
- [ ] If a government intends to prevent its currency’s value from falling relative to other currencies, it will purchase its currency from sellers in the market.
- [ ] An increase in inflation tends to increase the currency’s value with respect to other currencies with lower inflation.
The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following:
Suppose you observe the following spot and forward exchange rates between the U.S. dollar ($) and the Canadian dollar (C$):
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