Question
An American exporter expects to receive 5 million Canadian Dollars in 6 months. Current prices are given as: Spot rate, St Forward rate, Ft,T Bid
An American exporter expects to receive 5 million Canadian Dollars in 6 months.
Current prices are given as:
Spot rate, St Forward rate, Ft,T
Bid - ask Bid - ask
CAD/USD 1.3115-1.3120 1.3105-1.3115
6 month interest rates (annualized)
USD CAD
Bid - ask Bid - ask
0.4 - 0.6% 0.3 - 0.5%
(a) If the exporting firm sells the CAD with a forward contract, how many USD will they get in 6 months?
(b) If they replicate the forward contract in the spot and money markets, how many USD will they get in 6 months? (c) What can explain the difference between (a) and (b)?
(d) Are there any arbitrage opportunities at these prices?
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