Explanation:
The forward market will help the importer to lock in the exchange rate of 1.32 CAD per 1.00 USD. Thus, they will spend $1.32 \times 1,000,000 = ` CAD in the transaction.
Without the forward market, the importer would transact at 1.35 CAD per 1.00 USD, spending a total of $1.35 \times 1,000,000 = ` CAD
Total savings = $1,350,000- 1,320,00030`,000$ CAD
Q.625 A Canadian importer has ordered $1,000,000 US worth of oil drilling equipment to be delivered in six months. The current spot exchange rate is 1.3 CAD per 1.00 USD. However, the importer fears that the Canadian dollar will depreciate to 1.35 CAD per 1.00 USD in the next 6 months. As a result, the importer enters a forward contract to purchase $1,000,000 at a forward rate of 1.32 CAD per 1.00 USD. If the Canadian dollar depreciates to 1.35 CAD per 1.00 USD as predicted, what is the savings to the importer from his dealings in the forward market?
A
$350,000 CAD
B
$30,000 CAD
C
$50,000 CAD
D
$20,000 CAD
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