The spot rate on the Canadian dollar is C$1.1578. The risk-free nominal rate in the U.S. is 7 % while it is only 5 % in Canada. What one-year forward rate will create interest rate parity?

A) C$1.1362
B) C$1.1429
C) C$1.1563
D) C$1.1799
E) C$1.1815

Interest Rate Parity

Interest rate parity is an economic theory that suggests the difference between the interest rates of two countries is equal to the differential between the forward exchange rate and the spot exchange rate of their currencies.

Forward Rate

The predetermined rate at which two parties will exchange currencies on a future date, agreeing upon it in the present.

Spot Rate

The present cost at which a specific asset like a commodity, currency, or security is available for purchase or sale with immediate delivery.