PPP and Currency Futures Assume that you believe purchasing power parity exists. You expect that inflation in Canada during the next year will be 3 percent and inflation in the United States will be 8 percent. Today the spot rate of the Canadian dollar is $0.90 and the one-year futures contract of the Canadian dollar is priced at $0.88. Estimate the expected profit or loss if an investor sold a one-year futures contract today on 1 million Canadian dollars and settled this contract on the settlement date.

FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698
FindFind

International Financial Management

14th Edition
Madura
Publisher: Cengage
ISBN: 9780357130698

Solutions

Chapter 8, Problem 42QA
Textbook Problem

PPP and Currency Futures Assume that you believe purchasing power parity exists. You expect that inflation in Canada during the next year will be 3 percent and inflation in the United States will be 8 percent. Today the spot rate of the Canadian dollar is $0.90 and the one-year futures contract of the Canadian dollar is priced at $0.88. Estimate the expected profit or loss if an investor sold a one-year futures contract today on 1 million Canadian dollars and settled this contract on the settlement date.

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