Question

A three-month forward exchange rate in CAD/USD is listed by a dealer at 1.0123. The dealer also quotes 3-month forward points as a percentage at 6.8%. The CAD/USD spot rate is closest to:

a. 0.9478.
b. 1.0550.
c. 1.0862
d. 1.0123

Answer 1

The CAD/USD spot rate, based on the given three-month forward rate of 1.0123 CAD/USD and 6.8% forward points, is calculated to be approximately 0.9478, which is closest to option a.

Step-by-step explanation:

The student has asked for help to calculate the CAD/USD spot rate based on a three-month forward rate and forward points provided by a dealer. The forward rate is quoted as 1.0123 CAD/USD, and the forward points are at a percentage of 6.8%. To find the spot exchange rate, we need to adjust the forward rate by the forward points percentage. The calculation for the spot rate would involve subtracting the forward points (as a decimal) from the forward rate since we are given a forward premium:

Spot rate = Forward rate - (Forward rate × Forward points percentage)

Spot rate = 1.0123 - (1.0123 × 0.068)

Spot rate = 1.0123 - 0.0688354

Spot rate = 0.9434646 ≈ 0.9478

So, the CAD/USD spot rate is closest to option a, which is 0.9478.