Question
How would you go about setting up the following? Spot exchange rates:Canadian $0.96/U.S. dollar U.S. $1.05/British pound U.S. $1.10/euro Forward exchange rates (120 day):Canadian $0.968/U.S.
How would you go about setting up the following?
Spot exchange rates:Canadian $0.96/U.S. dollar
U.S. $1.05/British pound
U.S. $1.10/euro
Forward exchange rates (120 day):Canadian $0.968/U.S. dollar
U.S. $1.04/British pound
The following (annualized) interest rates on 120-day government bonds also exist today:
Canadian government, Canadian dollar-denominated:4.0%
U.S. government, U.S. dollar-denominated:1.5%
British government, British pound-denominated:4.4%
German government, euro-denominated: 0.4%
A British resident expects the future spot exchange rate in 120 days to be
U.S. $1.029/Canadian dollar.
(a)What forward contracting (be specific) should he do now, to attempt to profit by using forward speculation?Explain.
(b)Assume that the British resident actually took the action(s) that you specified in your answer to question (a).If the actual spot exchange rate in 120 days could turn out to be either the current ("today's") spot exchange rate or the current ("today's") forward exchange rate, which of these two rates would he prefer to be the actual future spot rate (or would he be indifferent between the two rates)?Explain.
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