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You are expecting a payment of C$100,000 two years from now. The risk-free rate of return is 3.8 percent in the U.S. and 4.1 percent in Canada. The inflation rate is 2 percent in the U.S. and 3 percent in Canada. Suppose the current exchange rate is C$1 = $.9132. How much will the payment two years from now be worth in U.S. dollars? Group of answer choices

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TomShelby

Answer:

In US dollars is expected to be worth : 105,091.21

Explanation:

First, we need to calculate the foward rate between the canadian dollar and US dollars

[tex]spot(1+(r_{f:C} - r_{f:US})\times2)[/tex]

1/0.9132 x ( 1 + (0.041-0.02)x2) = 0.9515544

What we are doing is calculate as simple interest for the difference in the interest rate for each country.

Then we convert the 100,000 canadian dollars for this rate:

100000 / 0.9515544 = 105,091.2066

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