You Have the Following Information $\begin{array}{ll}\text { today's spot } & \$ .6850 / \mathrm{CS} \\6 \text { months forward rate } & \$ .7100 / \mathrm{C \$}\end{array}$

question 23

Essay

You have the following information:
$\begin{array}{ll}\text { today's spot } & \$ .6850 / \mathrm{CS} \\6 \text { months forward rate } & \$ .7100 / \mathrm{C \$}\end{array}$
expected inflation rate in the U.S.: $4 \%$ p.a.
expected inflation rate in Canada: $2 \%$ p.a.
nominal interest rate in the U.S: $6 \%$ p.a. You are asked to forecast the spot exchange rate between the Canadian dollar and the U.S.dollar in six months.
a)What is your forecast based on purchasing power parity?
b)What is your forecast based on the forward expectations parity?
c)Based on the Fisher effect,what should be the real interest rate in Canada?
d)Why are the two forecasts in a and b different?

---

Definitions:

Cortisol

Cortisol is a steroid hormone produced by the adrenal glands, often referred to as the "stress hormone" because its levels increase in response to stress and anxiety.

High Levels

A term indicating that the quantity, degree, or rate of something is above normal or average.

Compulsion

A psychological condition characterized by the irresistible urge to perform certain actions repeatedly, often associated with obsessive-compulsive disorder.

Unwished-for Images

Intrusive and unwanted visual thoughts or memories that can cause distress, often associated with conditions like PTSD or OCD.