PPP and Real Interest Rates The nominal (quoted) U.S. one-year interest rate is 6 percent, whereas the nominal one-year interest rate in Canada is 5 percent. Assume you believe in purchasing power parity. You believe that the real one-year interest rate is 2 percent in the United States, and that the real one-year interest rate is 3 percent in Canada. Today the Canadian dollar spot rate is $0.90. What do you think the spot rate of the Canadian dollar will be in one year?

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 8, Problem 39QA
Textbook Problem

PPP and Real Interest Rates The nominal (quoted) U.S. one-year interest rate is 6 percent, whereas the nominal one-year interest rate in Canada is 5 percent. Assume you believe in purchasing power parity. You believe that the real one-year interest rate is 2 percent in the United States, and that the real one-year interest rate is 3 percent in Canada. Today the Canadian dollar spot rate is $0.90. What do you think the spot rate of the Canadian dollar will be in one year?

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