Finance Problem Set 10 2-3

1. Consider the following data collected on February 9, 2004. The interest rate given is for a one-year money market deposit. The spot exchange rate is the rate for February 9. The expected exchange rate is the one-year forward rate.

 iC\$ 2.5% E\$/C\$ .7541 \$/C\$ Ee\$/C\$ .7468 \$/C\$

A) Use both RoR formulae (one from section 10-4 the other from section 10-5: Step 5) to calculate the expected rate of return on the Canadian money market deposit and show that both formulae generate the same answer. (Express each answer as a percentage.)

B) What part of the rate of return arises only due to the interest earned on the deposit? (Express the answer as a percentage.)

C) What part of the rate of return arises from the percentage change in the value of the principal due to the change in the exchange rate? (Express the answer as a percentage.)

D) What component of the rate of return arises from the percentage change in the value of the interest payments due to the change in the exchange rate? (Again, express the answer as a percentage.)