Daphne, an international insurance fund manager, plans to sell equities denominated in Canadian $ (CAD) and...

Daphne, an international insurance fund manager, plans to sell equities denominated in Canadian $ (CAD) and purchase an equivalent amount of equities denominated in Euro (€).

Daphne will realize net proceeds of 10 million CAD at the end of 90 days and wants to eliminate the risk that the Euro will appreciate relative to the CAD during this 90-day period. The following exhibit shows current exchange rates between the CAD, Euro, and the U.S. dollar (USD).

Currency Exchange Rates

	CAD/USD	CAD/USD	EURO/USD	EURO/USD
Maturity	Bid	Ask	Bid	Ask
Spot	1.0956	1.1235	0.7281	0.7342
30-day	1.1011	1.1312	0.7225	0.7284
90-day	1.1277	1.1555	0.7057	0.7114

1.1. What currency transaction should Daphne undertake to eliminate currency risk over the 90-day period?

What is the current value of the equity portfolio when exchanged into Euro? (Assume the 90 day forwards have been entered into)

1.3. What is the spot ask CAD/Euro cross exchange rate?

1.4. What is the 90 day ask CAD/Euro forward rate?

1.5. What is the correct calculation for the annualized forward premium or discount of the CAD/Euro ask rate?

Solutions

Expert Solution

1.1 what currency transaction should Daphne undertake to eliminate currency risk over the 90 day period?

Sell 90 day CAD at 1.1555 against USD and buy 90 day forward EURO at 0.7057 against USD

1.2 . What is the current value of equity portfolio when exchanged into Euro?

Buy $ at 1.1555 CC for CAD 10,000,000	8,654,262.22
Sell $8,654,262.22 AT 0.7057 Euro	6,107,312.85

1.3 what is the spot ask CAD/EURO Cross exchange rate?

(Ask rate for CAD/USD)/(Bid rate for EURO/USD)

(1.1235/0.7281)

CAD/EURO = CAD 1.5431 / Euro

1.4 what is the 90 days ask CAD/EURO forward rate?

Sell 90 day CAD at 1.1555 against USD and buy 90 day forward EURO at 0.7057 against USD

CAD/EURO = 1.1555/0.7057

CAD/EURO = CAD 1.5852/Euro

1.5 what is correct calculation for the annualized forward premium or discount of the CAD/EURO ask rate?

[ 90 days forward rate - spot exchange rate]/spot exchange rate * 360/number of days

[(1.6374-1.5431)/1.5431)* 360/90

= 24.44%

jeff jeffy answered 1 year ago

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