Response to the following problem:
The expected returns of each person are as follows: Karen earns 6 percent due to interest rate parity, and earns the same return as that she could earn locally. Marcia earns 7 percent due to interest rate parity, and earns the same return as that she could earn locally
William earns 8.6 percent. If he converts, C$ = $.625 today. After 1 year, C$ = $.61. So if William invests C $1,000, it converts to $625. At the end of 1 year, he has $662.50. He converts to C$ and has C$1,086.
James is expected to earn 6 percent, since the international Fisher effect (IFE) suggests that on average, the exchange rate movement will offset the interest rate differential.