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The U.S. interest rate is7 percent and the Canadian dollar’s interest rate is 6 percent. The...

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Finance

The U.S. interest rate is7 percent and the Canadian dollar’sinterest rate is 6 percent. The Canadian dollar's forward rate hasa premium of 2 percent.  

(1) Calculate the effective financing rate for U.S.firms.  

(2) Does interest rate parity hold?

(3) Could U.S. firms lock in a lower financing cost by borrowingCanadian dollars and purchasing Canadian dollars forward for oneyear? Explain.  

Answer & Explanation Solved by verified expert
3.7 Ratings (357 Votes)
Home currency is USD and Foreign Currency is CAD According to Interest rate parity FS1Rd1Rf Where FForward rate of Foreign Currency S Spot rate of Foreign Currency Rd Interest rate in home country Rf Interest    See Answer
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