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Daphne, an international insurance fund manager, plans to sell equities denominated in Canadian $ (CAD) and purchase an equivalent amount of equities denominated in Euro

Daphne, an international insurance fund manager, plans to sell equities denominated in Canadian $ (CAD) and purchase an equivalent amount of equities denominated in Euro ().

Daphne will realize net proceeds of 10 million CAD at the end of 90 days and wants to eliminate the risk that the Euro will appreciate relative to the CAD during this 90-day period. The following exhibit shows current exchange rates between the CAD, Euro, and the U.S. dollar (USD).

Currency Exchange Rates

CAD/USD

CAD/USD

EURO/USD

EURO/USD

Maturity

Bid

Ask

Bid

Ask

Spot

1.0956

1.1235

0.7281

0.7342

30-day

1.1011

1.1312

0.7225

0.7284

90-day

1.1277

1.1555

0.7057

0.7114

1.1. What currency transaction should Daphne undertake to eliminate currency risk over the 90-day period? (2 marks)

What is the current value of the equity portfolio when exchanged into Euro? (Assume the 90 day forwards have been entered into) (2 marks)

1.3. What is the spot ask CAD/Euro cross exchange rate? (2 marks)

1.4. What is the 90 day ask CAD/Euro forward rate? (2 marks)

1.5. What is the correct calculation for the annualized forward premium or discount of the CAD/Euro ask rate? (2 marks)

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