The spot rate for Chinese yuan per Canadian dollar is 6.4440. If the Canadian interest rate is 2.50% and the Chinese interest rate is 3.00%, the 3-month no-arbitrage forward rate is closest to:
I don’t undertaand this. WHat is the logic for the forward rate being higher than the spot if rates are higher in China? The way I see it- if rates are higher in Chins, there is less lending in general so there are fewer Yuan in general…shouldn’t a pound by fewer Yuan then? Why does a pound by more Yuan in this casE?
The logic is that if the exchange rate doesn’t increase, there’s an arbitrage opportunity.
Note that interest rate parity is only one force that acts on exchange rates. Supply and demand − which you’ve cited − is another force that acts on exchange rates, generally in the opposite direction as interest rate parity.
I assume that when you wrote pound you meant Canuck dollar.
