Financial Risk Manager Part 1

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Explanation:

According to interest rate parity theorem, the forward exchange must be derived with the following equation:

Forward exchange rate of CAD per USD = Spot exchange rate × $\frac{1 + \text{CAD interest rate}}{1 + \text{USD interest rate}}$
= CAD 1.21 × ( $\frac{1.01}{1.03}$ ) = CAD 1.1865 / USD

Explanation:

According to interest rate parity theorem, the forward exchange must be derived with the following equation:

Forward exchange rate of CAD per USD = Spot exchange rate × $\frac{1 + \text{CAD interest rate}}{1 + \text{USD interest rate}}$
= CAD 1.21 × ( $\frac{1.01}{1.03}$ ) = CAD 1.1865 / USD

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Q.100 A foreign currency analyst based in Canada is forecasting the USD/CAD forward exchange rate. Currently, the spot exchange rate is USD/CAD 1.21 (i.e., CAD 1.21 per USD). Suppose that the interest rate in Canada is 1%, and the interest rate in the U.S. is 3%, which of the following is closest to the USD/CAD forward exchange rate?

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Last updated: May 21, 2026 at 04:19

CAD 1.1865 per USD

CAD 1.2463 per USD

CAD 1.2339 per USD

CAD 1.2221 per USD