Question

A Canadian dollar (C$) today is worth $1.02667. The one-year interest rate is 10% in Canada and 5% in the U.S. You will receive C$200 in one year from a Canadian customer, and you'll immediately use it to purchase Hong Kong dollars (HK$) to pay for imports from Hong Kong. The HK$ is pegged to the US$ at a rate of $0.098/HK$ by the H.K. central bank, and you believe it will remain so during the next year (i.e., you believe the $/HK$ spot rate in one year will be $0.098/HK$). Use the International Fisher Effect theorem to forecast how many HK$ you'll be able to purchase in a year with the C$200. Assume that arbitrage keeps spot prices properly aligned.

          A Canadian dollar (C$) today is worth $1.02667. The one-year interest rate is 10% in Canada and 5% in the U.S. You will receive C$200 in one year from a Canadian customer, and you'll immediately use it to purchase Hong Kong dollars (HK$) to pay for imports from Hong Kong. The HK$ is pegged to the US$ at a rate of $0.098/HK$ by the H.K. central bank, and you believe it will remain so during the next year (i.e., you believe the $/HK$ spot rate in one year will be $0.098/HK$). Use the International Fisher Effect theorem to forecast how many HK$ you'll be able to purchase in a year with the C$200. Assume that arbitrage keeps spot prices properly aligned.

Added by Nicole B.

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