The bank that you work for was just contacted by a customer. The customer wants to short
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Question:
The bank that you work for was just contacted by a customer. The customer wants to short a 6-month British Pound forward contract and wants a quote of the forward price. To come up with the price, you observe the following information:
Current exchange rate: C$ 1 = 0.40.
Current 6-month Canadian spot risk-free rate = 2.50% p.a.
Current 6-month British spot risk-free rate - 3% p.a.
(a) What price will you quote to the customer so that the bank will profit by C$ 0.0020 per one Pound?
(b) Suppose that the customer's borrowing rate (in either currency) is 0.50% higher than the risk-free rates, while his/her lending rate (in either currency) is 0.25% lower than the risk-free rates.Do you think the customer will accept the bank's contract?
Expert Answer:
To solve this problem we need to use the covered interest parity CIP relationship to determine the f... View the full answer
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