D is correct.

Two equations are needed to solve this question.

The first equation, as follows, is used to find the real interest rate in a single currency as a function of the nominal interest rate and the rate of inflation:

R_real = (1 + R_nom) / (1 + R_infl) - 1

The second equation describes the relationship between forward rates (F) and spot rates (S) assuming covered interest parity holds. R represents the risk-free rate in each currency.

F = S × [(1 + R_CAD)^t / (1 + R_USD)^t]

where:

• S = 1.21
• F = 1.19
• R_US = 0.85%
• R_infl_USD = 2.50%
• R_infl_CAD = 2.80%

Step 1: Calculate the real interest rate in the US R_real_US = (1 + 0.0085) / (1 + 0.025) - 1 R_real_US = 1.0085 / 1.025 - 1 R_real_US = 0.98390 - 1 = -1.61%

Step 2: Find the Canadian nominal interest rate using CIP 1.19 = 1.21 × (1 + R_CAD) / (1 + 0.0085) 1 + R_CAD = (1.19 × 1.0085) / 1.21 1 + R_CAD = 1.20012 / 1.21 = 0.99183 R_CAD = -0.817%

Step 3: Calculate the real interest rate in Canada R_real_CAD = (1 + R_CAD) / (1 + R_infl_CAD) - 1 R_real_CAD = 0.99183 / 1.028 - 1 R_real_CAD = 0.96481 - 1 = -3.52%

Step 4: Calculate the difference Difference = R_real_CAD - R_real_US = -3.52% - (-1.61%) = -1.91%

The difference between the real interest rates in Canada and the US is approximately 1.91% (Canada's real rate is lower than the US real rate by 1.91%).

A is incorrect. This value does not reflect the correct application of the Fisher equation combined with covered interest parity.

B is incorrect. This value is too small and likely represents a miscalculation in the inflation or interest rate adjustments.

C is incorrect. This value is close but does not accurately reflect the difference obtained through the correct application of PPP and CIP.