How between US interest rate and Canadian interest rate

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Assume that interest rate parity holds. At the beginning of the month, the spot rate of the Canadian dollar is $.70, while the one-year forward rate is $.68. Assume that U.S. interest rates increase steadily over the month. At the end of the month, the one-year forward rate is higher than it was at the beginning of the month. Yet the one-year forward discount is larger (the one-year premium is more negative) at the end of the month than it was at the beginning of the month.

Question 1: Explain how the relationship between the U.S. interest rate and the Canadian interest rate changed from the beginning of the month until the end of the month.

Reference no: EM132531256

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