Question

The Canadian-U.S. spot rate S0C$/$ is quoted as ‘‘C$1.2340/$ Bid and C$1.2350/$ Ak.’’ The 6-month forward rate F1C$/$ is quoted as ‘‘C$1.2382/$ Bid and C$1.2397/$ Ask.’’ Assume you reside in the United States. Calculate forward quotes for the Canadian dollar as an annual percentage premium or discount. Would a FX trader in Canada get a different answer if asked to calculate the annual percentage premium or discount on the U.S. dollar for each forward rate? Why?

Answer 1

Annual discount on Canadian Dollar :-

For Bid :- [ (1.2340-1.2382)/1.2380 ]*100* (12months/6months)

= 0.6784%

For Ask :- [ (1.2350-1.2397)/1.2397 ]*100* (12months/6months)

= 0.75825%

Annual premium on Canadian Dollar :-

For Bid :- [ (1.2382-1.2340)/1.2340 ]*100* (12months/6months)

= 0.680713%

For Ask :- [ (1.2397-1.2350)/1.2350 ]*100* (12months/6months)

= 0.761134%

Yes, the discount on Canadian dollar is not equal to Premium on dollar because While dividing the figure differs since both price & base currency are involved. that is disouct on Canadian Dollar will be different that from Premium on Dollar Because of the different exchange rate involved.