Montreal First Bank is selling forward contracts on the CAD/USD market.What exchange rate will they require for a three-month forward rate, if the spot rate is C$0.9800/USD, and the interest rates are 3% and 2.5% in Canada and the US respectively?
A)C$0.9752
B)C$0.9788
C)C$0.9812
D)C$0.9800

Question

Quizplus · Accepted Answer

The forward rate can be calculated using the formula: Forward Rate = Spot Rate * (1 + Interest Rate of Domestic Currency) / (1 + Interest Rate of Foreign Currency). Here, Forward Rate = 0.9800 * (1 + 0.03/4) / (1 + 0.025/4) = 0.9812.

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