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The nominal interest rate in the U.S. is 6% and the nominal interest rate in Canada is 3%. The spot value of the U.S. dollar is 1.1 ($/Canadian dollar) and the forward rate is 1.3 ($/Canadian dollar). Calculate the forward discount or premium for the dollar. Does the interest parity condition hold? If not explain what is likely to occur in foreign exchange markets. Assume that interest rates cannot change.
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