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. 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 ($) and the Canadian dollar (C$) Spot Exchange Rate 0.8876 One-Year Forward Exchange Rate 0.9023 Canadian dollar (U.S. dollar/Canadian dollar) 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? O 6.27% O 6.58% O 5.96% O 5.64%
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. 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 ($) and the Canadian dollar (C$) Spot Exchange Rate 0.8876 One-Year Forward Exchange Rate 0.9023 Canadian dollar (U.S. dollar/Canadian dollar) 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? O 6.27% O 6.58% O 5.96% O 5.64%
Chapter4: Exchange Rate Determination
Section: Chapter Questions
Problem 13QA
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Transcribed Image Text: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.
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 ($) and the Canadian dollar (C$)
Spot Exchange Rate
0.8876
One-Year Forward Exchange Rate
0.9023
Canadian dollar (U.S. dollar/Canadian dollar)
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?
O 6.27%
O 6.58%
O 5.96%
O 5.64%
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