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5. a. What is a yield curve? b. If you believe that IRP holds most of...

5. a. What is a yield curve?

b. If you believe that IRP holds most of the time, how do yield curves of U.S. and Canada relate to the forward rates of Canadian dollar?

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A.

A yield curve is a line that plots yields(interest) of bonds having equal credit quality but differing maturity dates. The slope of the yield curve gives an idea of the future interest rate changes and economic activity. There are three main types of yield curve shapes: normal(upward sloping curve), inverted (downward sloping curve) and flat.

B.

Using a currency exchange rate forecast can help brokers and businesses make informed decisions to help minimize risks and maximize returns. There many methods of forecasting currency rates exist. Looking into few of the following method can help determine the yield curves:

-Purchasing power parity

-Relative economic strength

-Econometric models of forecasting exchange rates

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