Suppose you can invest $1,000 Canadian for a year. Canadian one-year interest rates are 4 percent. In the United States one-year rates are 5 percent. The higher United States rates look attractive. If you keep your funds in Canadian dollars (invest in Canada), how much money will you have at the end of the year? If the exchange rate is $1.03Cdn/$1US then can you do better by buying a United States asset? What would be your decision if exchange rate becomes $1.009Cdn/$1US, would you buy US asset?