Montreal First Bank Is Selling Forward Contracts on the CAD/USD

question 6

Multiple Choice

Montreal First Bank is selling forward contracts on the CAD/USD market.What exchange rate will they require for a three-month forward rate,if the spot rate is C$0.9800/USD,and the interest rates are 3% and 2.5% in Canada and the US respectively?

• A) C$0.9752
• B) C$0.9788
• C) C$0.9812
• D) C$0.9800

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Definitions:

Price Level

An overall average price for the full range of goods and services in the economy.

Net Exports

The value of a country's total exports minus its total imports, indicating the balance of trade between a country and its trading partners.

Aggregate Demand

The overall appetency for every good and service in an economy, evaluated at a decided overall price level during a distinct timeline.

Crowding-out Effect

The phenomenon where increased government spending leads to a reduction in private sector investment, possibly due to higher interest rates or available resources.