The annual interest rate in Canada is 1.5%, the comparable rate in Europe is 1% and the spot rate for the EUR is CAD 1.4390 /EUR. a.) If covered interest parity holds, what should be the 90 day forward rate? b.) Now assume a Canadian importer is expecting a shipment of goods worth EUR 30 million from France in 90 days which he needs to pay for in EUR and he wants to hedge his exchange rate exposure by using a forward contract. What will be his cost in CAD if he uses a forward contract to hedge is exposure? How much does he lose/gain if the spot rate would rise to CAD 1.4525 /EUR respectively fall to CAD 1.4275 /EUR in the case with the hedge compared to if he just would have waited and purchased the EUR at the then prevailing spot rate? Please state the hypothetical gains/losses in CAD. c.) What could potentially be the largest loss (expressed in CAD) he could make with the forward contract if the exchange rate could move to very extreme values during this period?
The annual interest rate in Canada is 1.5%, the comparable rate in Europe is 1% and the spot rate for the EUR is CAD 1.4390 /EUR.
a.) If covered interest parity holds, what should be the 90 day forward rate?
b.) Now assume a Canadian importer is expecting a shipment of goods worth EUR 30 million from France in 90 days which he needs to pay for in EUR and he wants to hedge his exchange rate exposure by using a forward contract. What will be his cost in CAD if he uses a forward contract to hedge is exposure? How much does he lose/gain if the spot rate would rise to CAD 1.4525 /EUR respectively fall to CAD 1.4275 /EUR in the case with the hedge compared to if he just would have waited and purchased the EUR at the then prevailing spot rate? Please state the hypothetical
gains/losses in CAD.
c.) What could potentially be the largest loss (expressed in CAD) he could make with the forward contract if the exchange rate could move to very extreme values during this period?
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