The rise of globalization is due to the many companies that have become multinational corporations for various reasons-for example, to access bettertechnology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk.This multimarket presence exposes companies to different kinds of risk as well for example, political risk and exchange rate risk.The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following:Suppose you observe the following spot and forward exchange rates between the U.S. dollar ($) and the Canadian dollar (C$)Spot Exchange Rate0.8876One-Year Forward Exchange Rate0.9023Canadian dollar (U.S. dollar/Canadian dollar)The current one-year interest rate on U.S. Treasury securities is 8.03%. If interest rate parity holds, what is the expected yield on one-year Canadiansecurities of equal risk?O 6.27%O 6.58%O 5.96%O 5.64%

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Asked May 2, 2019
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The rise of globalization is due to the many companies that have become multinational corporations for various reasons-for example, to access better
technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk.
This multimarket presence exposes companies to different kinds of risk as well for example, political risk and exchange rate risk.
The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following:
Suppose you observe the following spot and forward exchange rates between the U.S. dollar ($) and the Canadian dollar (C$)
Spot Exchange Rate
0.8876
One-Year Forward Exchange Rate
0.9023
Canadian dollar (U.S. dollar/Canadian dollar)
The current one-year interest rate on U.S. Treasury securities is 8.03%. If interest rate parity holds, what is the expected yield on one-year Canadian
securities of equal risk?
O 6.27%
O 6.58%
O 5.96%
O 5.64%
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The rise of globalization is due to the many companies that have become multinational corporations for various reasons-for example, to access better technology, to enter new markets, to obtain more raw materials, to find funding resources, to minimize production costs, or to diversify business risk. This multimarket presence exposes companies to different kinds of risk as well for example, political risk and exchange rate risk. The relationship between interest rates and exchange rates can be represented through the concept of interest rate parity. Consider the following: Suppose you observe the following spot and forward exchange rates between the U.S. dollar ($) and the Canadian dollar (C$) Spot Exchange Rate 0.8876 One-Year Forward Exchange Rate 0.9023 Canadian dollar (U.S. dollar/Canadian dollar) The current one-year interest rate on U.S. Treasury securities is 8.03%. If interest rate parity holds, what is the expected yield on one-year Canadian securities of equal risk? O 6.27% O 6.58% O 5.96% O 5.64%

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Expert Answer

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Relative interest rate constitute as one of the major factors in determining the exchange rates. For instance, if interest rates are relatively higher in US than in India, Indian funds are likely to be attracted to the US as Indian bankers and investors will earn higher yields by parking their funds in US than in India. As a consequence, there will be more demand for US  $ in India, causing appreciation in the exchange.

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