Question

The current USD/CAD exchange rate is 1.25 CAD per USD. If the continuously compounded annual interest...

  1. The current USD/CAD exchange rate is 1.25 CAD per USD. If the continuously compounded annual interest rate is 0.5% in U.S. and 1% in Canada, what is the forward exchange rate in units of CAD per a unit of USD in 3 years from now?

    A. 1.21 B. 1.23 C. 1.27 D. 1.29 E. 1.45

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Answer #1

Calculate the forward rate as follows:

Therefore, the forward rate is 1.27 CAD.

Formulas:

NOTE: EXP is the function used in excel to calculate the continuous compounding.

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