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What is expected future spot exchange rate of USD per CAD

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Reference no: EM133042657

Problem - Consider the following facts about Canadian dollar: The current spot exchange rate is CAD1.29/USD.

Over the next 9D days, there is a 60% probability that the CAD will strengthen relative to the US dollar by 6%, and there is a 40% probability that the CAD will weaken by 3%.

Required -

a. What is the expected future spot exchange rate of USD per CAD?

b. Suppose that the 90-day forward rate is CAD1.32/USD.

i) What contract would you make to speculate in the 90-day forward market by either buying or selling CAD 100,000?

ii) Calculate your expected US dollar profit in the 90-day forward market using CAD 100,000 (forward speculation).

c. Given that the rate of change in the exchange rate is conditionally normally distributed, if the standard deviation of the 90-day rate of appreciation of the CAD relative to the USD is 4%, what range covers 95.45% of your possible US dollar profits and losses?

Reference no: EM133042657

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