A Canadian exporter, Victoria Exports, will be receiving six payments of €10,000, ranging from now to 12 months in the future. Since the company keeps cash balances in both Canadian dollars and US dollars, it can choose which currency to change the euros to at the end of the various periods. Which currency appears to offer the better rates in the forward?

Question

Period Days Forward CAD/€ Mid Rate USD/€ Mid Rate
Spot 1.38390 1.19140
1 month 30 1.38439 1.19260
2 months 60 1.38444 1.19410
3 months 90 1.38590 1.19560
6 months 180 1.38750 1.20130
12 months 360 1.39189 1.21300

Answer 1

To determine which currency offers better rates in the forward, we need to compare the forward premiums or discounts of both currencies.

Forward premium or discount is calculated as: (Forward Rate - Spot Rate) / Spot Rate

For CAD/€:
1 month: (1.38439 - 1.38390) / 1.38390 = 0.00035
2 months: (1.38444 - 1.38390) / 1.38390 = 0.00039
3 months: (1.38590 - 1.38390) / 1.38390 = 0.00144
6 months: (1.38750 - 1.38390) / 1.38390 = 0.00260
12 months: (1.39189 - 1.38390) / 1.38390 = 0.00577

For USD/€:
1 month: (1.19260 - 1.19140) / 1.19140 = 0.00100
2 months: (1.19410 - 1.19140) / 1.19140 = 0.00227
3 months: (1.19560 - 1.19140) / 1.19140 = 0.00352
6 months: (1.20130 - 1.19140) / 1.19140 = 0.00829
12 months: (1.21300 - 1.19140) / 1.19140 = 0.01811

Comparing forward premiums or discounts for both currencies:
1 month: CAD/€ (0.00035) vs USD/€ (0.00100) - CAD offers better rate
2 months: CAD/€ (0.00039) vs USD/€ (0.00227) - CAD offers better rate
3 months: CAD/€ (0.00144) vs USD/€ (0.00352) - CAD offers better rate
6 months: CAD/€ (0.00260) vs USD/€ (0.00829) - CAD offers better rate
12 months: CAD/€ (0.00577) vs USD/€ (0.01811) - CAD offers better rate

In conclusion, based on the forward premiums or discounts, the Canadian Dollar (CAD) appears to offer better rates in the forward.