Question: (a) The Canadian spot rate for U .S. funds is 1.3980 and the 90-day forward rate is 1.4240. The current yield on 90-day Canadian treasury bills is 8.50 percent, and 90-day U .S. treasury bills yield 6.50 percent. Should a Canadian invest in Canadian or in U.S. bills?
(b) Assuming that the effective yield after hedging for foreign exchange risk should be the same for investments in both countries, what should be the 90-day forward rate for U .S. funds?