You are a U.S. investor considering purchase of one of the following securities. Assume that the currency risk of the Canadian government bond will be hedged, and the 6 month discount on Canadian dollar forward contracts is .75% versus the U.S. dollar.
|
Bond |
Maturity |
Coupon |
Price |
|
U.S. government |
6 months |
6.50% |
100.00 |
|
Canadian government |
6 months |
7.50% |
100.00 |
Calculate the expected price change required in the Canadian government bond which would result in the two bonds having equal total returns in U.S. dollars over a 6 month horizon. Assume that the yield on the U.S. bond is expected to remain unchanged.