Currently the spot rate between the Canadian dollar and euro is C$1.37/ and the 3-month forward rate is C$1.37287/. However, you believe that the spot exchange rate will move to C$1.365/ in the next 3 months.

Answer:

(1) Do you believe that the Canadian dollar will appreciate or depreciate? By how much?

(2) How could you profit from your belief by using the forward market, that is should you buy or sell euro forward? How much profit (in terms of Canadian dollars) could you make per forward contract (size = 100,000) if the spot exchange rate indeed moves to C$1.36/ at the end of 3 months?

(3) What would happen to your position in forward contracts if the exchange rate moves to C$1.375? Determine your profit/loss (in terms of Canadian dollar) per contract under this scenario.