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Reflecting prevailing interest-rate differentials

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Question: An individual has C$50,000 to invest. The effective annual interest rate in Canada is 12 percent. The Canadian dollar is currently worth US$0.73. The 90-day forward exchange rate is US$0.72 and the I-year forward rate is US$0.71, reflecting prevailing interest-rate differentials.

(a) If this person decides to invest for a full year, at which U.S. interest rate would she be indifferent between a Canadian and a U.S. investment?

(b) If this person decides to invest for 90 days, at which U.S. interest rate would she be indifferent?

Reference no: EM131748688

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