A Canadian investor has a domestic currency risk-free rate of 4 percent. The risk free rate in the U.S. is 5 percent. The investor expects the Canadian currency (Can$) to appreciate by 1 percent against the U.S. dollar ($). What is the foreign currency risk premium (FCRP)? A) 0%. B) 1%. C) -1%. D) 3%
A - still learning the eco crap
A -1 - - 1 = 0
Okay, I am very sure I’m wrong, because this seems easy and its been awhile since I covered ICAPM, but I’ll guess A.
No swan you have to be right, I got A as well. With our answers being the same there is no way we could be wrong!
haha, sit next to me on June 7th
A. Canadian investor. CAN appreciates by 1% so USD depreciates by 1%. FCRP (for USD) = %change US - (r dc - r fc) = -1 - (4-5) = 0.
Your answer: A was correct! The FCRP is the expected appreciation of the foreign currency minus the interest rate differential (domestic-foreign). Hence, the FCRP is 0% (= –1% appreciation of U.S. dollar minus –1% interest rate differential (i.e., rDC – rFC = 4% – 5% = –1%). *************************************************************** I was going to call the thread “ICAPM softball”, but it always sucks to miss a question after somebody tells you it is easy. 
Everbdoy is right!
It scared me at first cause I know you post hard q’s so I was sure I was going to look really stupid choosing what appeared to be an obvious answer at first glance.
Give it up for Hurricane on his first post. 1/1. Welcome to AF. Thanks for no longer being a lurker.
Black Swan Wrote: ------------------------------------------------------- > haha, sit next to me on June 7th I’ll be there in spirit - copying your answers from Toronto 
mwvt9 Wrote: ------------------------------------------------------- > Give it up for Hurricane on his first post. 1/1. > > Welcome to AF. Thanks for no longer being a > lurker. Good Job Hurricane! Here comes the hurricane na na na…
would someone correct my logic if I’m wrong… Since you are a Canadian investor, if you hold are holding a USD denominated asset and the USD depreciates by 1%, you will lose that one percent on your investment when exchanged back to CAD, so the first term in the FCRP is -1. But, since the RF rate in the US is 1 point higher than in Canada, you will basically offset the -1% from currency, so net/net, your FCRP is 0… does that sound right?
yeah…