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Calculate the expected exchange rate

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Reference no: EM133504359

Case: Consider the following price structure for government securities in Canada and the United States.

Assume that, in both cases, the government securities are one-year bonds, yielding the face value of the security in one year's time. The exchange rate E is 1 US dollar = 0.72 CAD dollar.

  Face value price
United States, one-year bond 10 000 $US 9615.38 $US
Canada, obligation à un an  10 000 $CAD 9433.96 $CAD

Question 1. Calculate the nominal interest rate for each bond

Question 2. Calculate the expected exchange rate for the following year, consistent with the uncoverede interest rate parity (UIRP)

Question 3. If the US dollar is expected to depreciate against the CAD, which security should you buy?

Question 4. Suppose you are a U.S. investor. You exchange US dollars against the CAD and buy Canadian bonds. In a year's time, it turns out that E is actually worth 1.11 (US$1 = CAD$1.11). What is the return in US dollars compared with the return if you had held US bonds?

Question 5. Are these differences in return in question 4. compatible with the UIRP? Justify your answer.

Reference no: EM133504359

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