Textbook Problem

IRP and Changes in the Forward Rate Assume that interest rate parity exists. As of this morning, the one-month interest rate in Canada was lower than the one-month interest rate in the United States. Assume that as a result of the Fed’s monetary policy this afternoon, the one-month interest rate in the United States declined this afternoon, but was still higher than the Canadian one-month interest rate. The one-month interest rate in Canada remained unchanged. Based on the information, the forward rate of the Canadian dollar exhibited a____[ discount or premium] this morning that____[ increased decreased] this afternoon. Explain.