Question

Suppose the nominal risk-free rate of interest in US is 3%, and that of Canada is 2%. The inflation rate in US is 5%, what is the inflation rate in Canada? A. 1% OB.-1% C.2% D.4% - E none QUESTION 10 Estimate the exchange rate in the next two years, if US inflation rate is 5%, and that of Canada is 4%. The current spot rate is $10585 Tip Use the "Amoateng Gut Check' to forecast this exchange rate O A $1.0790 OB $1.0790 CS10384 OD $1.0384 E none

Answer 1

Nominal Rate = Real Rate + Inflation Rate

In US

3 = Real rate + 5

Real rate = - 2 %

In Canada

2 = - 2 + Inflation rate

Inflation rate = 4 %

Option D : 4%

Question

US inflation rate (r) = 5% = 0.05

Canada Inflation rate (p) = 4% = 0.04

Time (n) = 2

Future rate = 1.0585 × [(1+r)ⁿ/(1+p)ⁿ]

= 1.0585 × [(1+0.05)² / (1+0.04)² ]

= 1.0585 × 1.1025 / 1.0816

= 1.0790

Option A : $ 1.0790