Assume that in Canada the nominal interest rate is equal to 3% per year and in China the nominal interest rate is 9% per year. The current Chinese Yuan/Canadian Dollar (CNY/CAD) exchange rate is 5CNY/CAD. Based on these figures, what will be the forward CNY/CAD exchange rate in two years? State your answer using two decimals (e.g., 5.01)

To calculate the forward exchange rate, we can use the concept of interest rate parity, which relates the spot exchange rate, the forward exchange rate, and the interest rates in the two countries.

The formula for the forward exchange rate \( F \) is:

\[ F = S \times \left( \frac{1 + i_{\text{domestic}}}{1 + i_{\text{foreign}}} \right)^t \]

where:
- \( S \) is the current spot exchange rate.
- \( i_{\text{domestic}} \) is the domestic interest rate (in Canada).
- \( i_{\text{foreign}} \) is the foreign interest rate (in China).
- \( t \) is the time period in years.

Given the following dataTo calculate the forward exchange rate, we can use the concept of interest rate parity, which relates the spot exchange rate, the forward exchange rate, and the interest rates in the two countries.

The formula for the forward exchange rate \( F \) is:

\[ F = S \times \left( \frac{1 + i_{\text{domestic}}}{1 + i_{\text{foreign}}} \right)^t \]

where:
- \( S \) is the current spot exchange rate.
- \( i_{\text{domestic}} \) is the domestic interest rate (in Canada).
- \( i_{\text{foreign}} \) is the foreign interest rate (in China).
- \( t \) is the time period in years.

Given the following 
- Spot exchange rate \( S = 5 \, \text{CNY/CAD} \)
- Domestic interest rate \( i_{\text{domestic}} = 3\% = 0.03 \)
- Foreign interest rate \( i_{\text{foreign}} = 9\% = 0.09 \)
- Time period \( t = 2 \, \text{years} \)

Plugging these values into the formula, we get:

\[ F = 5 \times \left( \frac{1 + 0.03}{1 + 0.09} \right)^2 \]

Let's calculate the forward exchange rate step by step:

1. Calculate the ratio of the interest rates:

\[ \frac{1 + 0.03}{1 + 0.09} = \frac{1.03}{1.09} \approx 0.9459 \]

2. Raise this ratio to the power of \( t \):

\[ (0.9459)^2 \approx 0.8947 \]

3. Multiply by the spot exchange rate \( S \):

\[ F = 5 \times 0.8947 \approx 4.47 \]

Therefore, the forward CNY/CAD exchange rate in two years is approximately \( 4.47 \).

Would you like more details or have any questions?

Here are some related questions you might find interesting:
1. How does the interest rate parity theory explain the relationship between interest rates and exchange rates?
2. What factors can cause deviations from the interest rate parity?
3. How does inflation impact nominal interest rates and exchange rates?
4. Can you explain the difference between nominal and real interest rates?
5. How do forward contracts help in managing exchange rate risk?

**Tip:** When working with exchange rates and interest rates, always ensure you are clear on which country's rates are considered domestic and which are foreign to avoid confusion in calculations.

Learn how to calculate the forward CNY/CAD exchange rate in two years using interest rate parity. Given spot exchange rate of 5 CNY/CAD, domestic interest rate of 3%, and foreign interest rate of 9%, find out how these factors influence future exchange rates.

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