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?
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
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.
To determine which currency offers the better rates in the forward, we need to compare the forward rates of CAD/€ and USD/€ at each period. The currency with the higher forward rate relative to the spot rate will be more advantageous for Victoria Exports.
Let's analyze the rates for each period:
- 1 month (30 days forward):
- CAD/€: 1.38439
- USD/€: 1.19260
- 2 months (60 days forward):
- CAD/€: 1.38444
- USD/€: 1.19410
- 3 months (90 days forward):
- CAD/€: 1.38590
- USD/€: 1.19560
- 6 months (180 days forward):
- CAD/€: 1.38750
- USD/€: 1.20130
- 12 months (360 days forward):
- CAD/€: 1.39189
- USD/€: 1.21300
Based on the analysis, we can see that the CAD/€ forward rates are consistently higher than the USD/€ forward rates for all periods. Therefore, it appears that the Canadian dollar (CAD) offers better rates in the forward compared to the US dollar (USD) for Victoria Exports.
To determine which currency offers the better rates in the forward, we need to compare the CAD/€ and USD/€ rates for each period.
First, let's calculate the rates for each currency at the end of each period.
For CAD/€:
- 1 month: 1.38439
- 2 months: 1.38444
- 3 months: 1.38590
- 6 months: 1.38750
- 12 months: 1.39189
For USD/€:
- 1 month: 1.19260
- 2 months: 1.19410
- 3 months: 1.19560
- 6 months: 1.20130
- 12 months: 1.21300
Now, we can compare the rates for each currency. Generally, a higher rate means the currency is stronger compared to the euro, which would be more favorable for Victoria Exports.
Comparing CAD/€ and USD/€ rates:
- 1 month: CAD/€ (1.38439) > USD/€ (1.19260)
- 2 months: CAD/€ (1.38444) > USD/€ (1.19410)
- 3 months: CAD/€ (1.38590) > USD/€ (1.19560)
- 6 months: CAD/€ (1.38750) > USD/€ (1.20130)
- 12 months: CAD/€ (1.39189) > USD/€ (1.21300)
Based on this comparison, the CAD/€ rates appear to offer better rates than the USD/€ rates for all periods. Therefore, it would be more favorable for Victoria Exports to change the euros to Canadian dollars at the end of each period.