Montreal First Bank is selling forward contracts on the USD/CAD exchange market.What exchange rate would they require for a three-month forward rate, if the spot rate is C$ 1.0200/USD and the interest rates are 3% and 2.5% in Canada and the US respectively?
A)C$1.0249
B)C$1.0213
C)C$1.0187
D)C$1.0200

Question

Quizplus · Accepted Answer

To calculate the three-month forward rate, we use the formula:

Forward rate = Spot rate x (1 + domestic interest rate)/(1 + foreign interest rate) ^ time

Substituting the values given:

Forward rate = 1.0200 x (1 + 0.03)/(1 + 0.025) ^ (3/12)
Forward rate = 1.0200 x 1.0075/1.00625
Forward rate = 1.0213

Therefore, the Montreal First Bank would require a forward exchange rate of C$1.0213/USD for a three-month forward contract on the USD/CAD exchange market. The correct answer is B).

Montreal First Bank Is Selling Forward Contracts on the USD/CAD