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Basic Question 3 of 4
Suppose the domestic currency is the U.S. dollar and the foreign currency is the Canadian dollar.
- The spot exchange rate is $0.7321.
- The U.S. interest rate is 3.5%.
- The Canadian interest rate is 4.25%.
- Assume these interest rates are fixed and don't change over the life of the forward contract. They are based on annual compounding and are not quoted as LIBOR-type rates.
- Assume a currency forward contract has a maturity of 90 days.
What should be the forward price if you want to enter into a forward contract to long Canadian dollars in 90 days? What if interest is continuously compounded?
User Contributed Comments 4
| User | Comment |
|---|---|
| danlan2 | They are always equal. |
| NIKKIZ | Are they not equal just because of rounding? working to 5 decimals I got 0.73076 for discrete compounding and 0.73080 for continuous. Shouldn't continuous compounding increase the value compared to discrete? |
| tushi123 | @nikkiz- since the denominator is larger,continuous compounding will decrease the value |
| mtsimone | No, they're not always equal. The reason they are here is that we're at 4 decimal places (currency future convention) and it's only a 90 day contract. If the contract was 2 years you'd see a difference at 4 decimal places, in fact the difference at 4 places is .0004 and at 5 is .000404. If it were a 500M contract that's 201K+ difference and if it were my portfolio I'll take it. |
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Learning Outcome Statements
describe how fixed-income forwards and futures are priced, and calculate and interpret their no-arbitrage value;
CFA® 2025 Level II Curriculum, Volume 5, Module 31.