Question

As a foreign exchange trader at U.S. Bank, one of your customers would like a Canadian dollar (CAD) quote on euro (€). Current market rates are:

Spot 30-day

CAD1.2974-99/$1 22-18

€0.9215--85/$1. 12-35

a. What bid and ask cross rates would you quote on spot euro: S(CAD/€)?

b. What outright CAD cross rates would you quote on 30-day forward euro: F(CAD/€)

c. What is the forward premium or discount on buying 30-day € against CAD delivery?

Answer 1

	Bid-Ask Cross Rate
	Bid(CAD/€) = Bid(CAD/$) * Bid($/€)
	= Bid(CAD/$) * 1/Ask(€/$)
	Ask(CAD/€) = Ask(CAD/$) * Ask($/€)
	= Ask(CAD/$) * 1/Bid(€/$)
a)	Particulars	Bid	Ask
	Spot (CAD/$)	1.2974	1.2999
	Spot (€/$)	0.9215	0.9285
	Spot Bid(CAD/€) = 1.2974 / 0.9285	1.3973
	Spot Ask(CAD/€) = 1.2999 / 0.9215		1.4106
b)	Swap in Ascending Order = Add to Spot Rate
	Swap in Descending Order = Less from Spot Rate
	Particulars	Bid	Ask
	Spot (CAD/$)	1.2974	1.2999
	Swap (CAD/$)	0.0022	0.0018
	30 Day Forward Rate (CAD/$)	1.2952	1.2981
	Spot (€/$)	0.9215	0.9285
	Swap (€/$)	0.0012	0.0035
	30 Day Forward Rate (€/$)	0.9227	0.9320
	30 Day Forward Bid(CAD/€) = 1.2952 / 0.9320	1.3897
	30 Day Forward Ask(CAD/€) = 1.2981 / 0.9227		1.4068
c)	CAD/€ is a direct quote and Spot Rate is more than Forward Rate
	So Euro is at discount
	Also we want to buy 30-Day Euro, so we will consider Ask Rate.
	Forward Discount Rate = (Forward Rate-Spot Rate)/Spot Rate *(365Days/30Days)*100
	=(1.4068-1.4106)/1.4106*(365/30)*100
	=(-0.0038)/1.4106*(365/30)*100
	= 3.28%