The current spot exchange rate is between Canada and United States is CA$ 1.2200/$. Over the next 180 days, there is a 25% probability that the Canadian dollar will weaken relative to the U.S. dollar by 15%, and there is a 75% chance that the Canadian dollar will strengthen by 5%.
a. What is the expected future spot exchange rate of U.S. dollars per Canadian dollar?
b. Based on your calculation of the expected future spot exchange rate in the previous question and if the current forward rate is CA$ 1.5200/$, calculate your expected dollar profit from contracting either to buy or to sell CA$ 1,000,000 for US$ in the 180-day forward market.
c. How much will you actually win or lose in 180 days if there is a 100% probability that the Canadian dollar will weaken relative to the U.S. dollar by 15%?
d. How much will you actually win or lose in 180 days if there is a 100% chance that the Canadian dollar will strengthen by 5%