What Can Be Said About the Spot Exchange Rate of Dollars

question 31

Multiple Choice

What can be said about the spot exchange rate of Dollars for pounds if nominal interest rates are higher in Canada than in Great Britain?

• A)It should exceed the forward rate of Dollars for pounds
• B)It should be less than the forward rate of Dollars for pounds
• C)It is expected to increase
• D)It is expected to remain constant

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Definitions:

Currency Risk

The potential for financial loss resulting from fluctuations in exchange rates affecting investments or transactions in foreign currencies.

Foreign Bonds

Bonds sold by a foreign borrower but denominated in the currency of the country in which the issue is sold. Thus, a Canadian firm selling bonds denominated in Swiss francs in Switzerland is selling foreign bonds.

Domestic Bonds

Bonds issued within a country's borders and typically denominated in that country's currency.

Market Rate of Interest

The prevailing rate of interest determined by supply and demand in the credit market that borrowers must pay to lenders.