3.What is the difference between a spot and forward FX rate? Suppose that the sp

Question

3.What is the difference between a spot and forward FX rate? Suppose that the spot US Dollar price of the Canadian Dollar was $0.90 and the 180 day forward rate is $0.9180. What does the forward price relative to the spot price tell us about the predicted direction of the Canadian dollar? Is that forward rate an accurate predictor of the spot rate in 180 days? What are the spot and forward Canadian Dollar prices of the US Dollar? Please describe the two types of participants in the forward FX market.

Explanation / Answer

Spot Rate = $0.90 per Canadian Dollar

180 days Forward rate = 0.9180 per Canadian dollar.

a.

Spot Rate is $0.90 per Canadian Dollar, it means to purchase one canadian dollar total 0.90 US dollar required at current time. after 180 days forward $0.918 per Canadian Dollar, it mean t ourchase one canadian dollar to tal 0.918 US dollar required.

It means cost of canadian dollar with respected to US dollar increase. It means Canadian dollar has appreciated in 180 days against US dollar.

2.

Exchnage rate between currency depends on various factors, such, interest rate in both countries, inflation rate is both countries, demand and supply of currency, value of trade between countries.

So, it is not necessary that forward rate an accurate predictor of the spot rate in 180 days.

3.

Spot rate in case of canadian dollar = 1 / 0.90

= .CAD$1.1111.per US dollar.

Spot rate is CAD$1.1111 per US dollar.

Forward rate in case of canadian dollar = 1 / 0.9180

= .CAD$1.0893.per US dollar.

Forward rate is CAD$1.0893 per US dollar

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