You have the following information: You are asked to forecast the spot exchange rate between the Canadian dollar and the U.S. dollar in six months.

a) What is your forecast based on purchasing power parity? b) What is your forecast based on the forward expectations parity? c) Based on the Fisher effect, what should be the real interest rate in Canada? d) Why are the two forecasts in a and b different?

today's spot 6 months forward rate $.6850/C$ $.7100/C$ expected inflation rate in the US. : 490 . a. expected inflation rate in Canada: 290 p.a. nominal interest rate in the US: 6% p.a