Question

Suppose the exchange rate for the Canadian dollar (USD/CAD) is quoted as 1.34 in the spot market and 1.30 in the 90-day forward market. Does the financial market expect the Canadian dollar to strengthen or weaken relative to the dollar?

Answer 1

The current exchange rate of Canadian dollar to US dollar is 1.34 which means that a person who wants to convert his canadian dollars into US dollars will have to pay 1.34 Canadian dollars in exchange of 1 US dollar.

Which means that if a person wants to but 100 US dollars, he will have to pay 134 Canadian dollars.

Now as per the given 90 day forward market rate, the future exchange rate of Canadian dollar to US dollar is 1.30. This indicates that if a person who wants to convert his canadian dollars into US dollars will have to pay 1.30 Canadian dollars in exchange of 1 US dollar. Therefore the person who earlier paid 134 canadian dollars to buy 100 US dollars will now have to pay just 130 canadian dollars.

This means that the Canadian dollar has strenthened relative to the US dollar, because less canadian dollars now can buy the equivalent amount , for which a person had to pay more earlier. So financial market expects canadian dollars to strengthen and US dollar to weaken in future period.

Hope I am able to solve your concern. If you are satisfied hit a thumbs up !!