Question
Some time ago, a bank entered a long currency forward for 10 million USD. Under the terms of the contract, the exchange rate was set
Some time ago, a bank entered a long currency forward for 10 million USD. Under the terms of the contract, the exchange rate was set to be 0.82 USD per CAD. A client is the counterparty to this contract.
a. What is the value of the contract for the client if the contract has 8 months left, the current exchange rate is 0.79 USD per CAD and the 8-month risk free rates in the US and Canada are 5% and 5.6% respectively (per annum with continuous compounding)?
b. What should be the forward exchange rate offered to a new client on a long forward for 10 million USD for delivery in 8 months if the bank wants to obtain a premium of $500,000 (hint: unlike the theoretically correct delivery price that makes the value of the contract to be 0 at inception, the bank will look to make a profit by setting the delivery exchange rate so the value of the contract at inception is equal to the premium)
Can you explain where you get the formulas from.
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