question archive Currently, one CAD is worth about 0
Currently, one CAD is worth about 0
Subject:FinancePrice:2.88 Bought32
Currently, one CAD is worth about 0.8 USD. If over the next 5 years, Canadian inflation turned out to be 2%, US inflation 3%, and real GDP growth 1% in each country, every year, what would you expect the exchange rate to be in 5 years?
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| Inflation Rate | Real GDP Growth | |
| Canada | 2% | 1% |
| USA | 3% | 1% |
| Computation of Nominal Intereset Rate: |
| (1+Nominal Interest) = (1+Inflation)(1+Real Growth Rate) |
| For Canada: |
| (1+Nominal Interest) = (1+0.02)(1+0.01) |
| 1+Nominal Interest = 1.0302 |
| Nominal Interest Rate = 0.0302 (or) 3.02% |
| For USA: |
| (1+Nominal Interest) = (1+0.03)(1+0.01) |
| 1+Nominal Interest = 1.0403 |
| Nominal Interest Rate = 0.0403 (or) 4.03% |
| As per Interest Rate Parity Theorem, |
| Fair Forward Rate = USD (1 + i USD)^n / (1 + iCAD)^n |
| Fair Forward Rate = 0.8 (1 + 0.0403)^5 /(1 + 0.0302)*5 |
| Fair Forward Rate = 0.8 * 1.04999 |
| Fair Forward Rate = 0.839992 (or) 0.84 |
