Question

The current pandemic crisis caused a depreciation of Canadian dollar compared to the US dollar. The exchange rate increased from US$1 = C$1.30 in February to US$1 = C$1.40 in May.

1. a) If you want to explain this increase in the exchange rate with the changes in the Canadian interest rate. What would be your interpretations? Did the Central Bank in Canada cut the interest or increase it? And how that can affect the rise in the exchange rate?

2. b) What is the implication of your answer in (a) for the Canadian bond’s price? Write down the equation for the price of bond and explain how your result in (a) can affect the price of bond?

Answer 1

a) :- In the ongoing time of COVID emergency, the vast majority of the monetary standards on the planet has fallen in an incentive in comparision to USD beacuse of the hold cash status of US. This frenzy purchasing of USD has brought about fall in the estimation of other cash.

Same thing occurred with CAD where it devalued rapidly and afterward at long last Canadian Centrak bank brought financing costs down to siphon in liquidity into the framework. This anyway has not brought about significant adjustment of CAD, exhange rate cooled from CAD1.45 to 1.4 now however the impact of lower loan fee will be found in the up and coming time when this circumstance standardizes.

Trade rates move according to the distinction between the loan fees in the two markets. Accepting that the financing costs in the US have stayed unaltered, the ones in Canada more likely than not gone up to cause a deterioration in the CAD. An ascent in Canadian loan fees causes a devaluation in the CAD so any exchange openings are disposed.

b):- We realize that bond costs are only the NPV of the incomes from the bond, which is a limited stream of incomes. Since the Canadian financing costs have gone up, the bond costs in Canada more likely than not fallen (as the markdown factor has gone up). Bond cost = Sum of (incomes 1....n)/(1+r)^t