Just wanted to get some intuitive understanding:
Maple Leaf International is a Canadian corporation with business in Europe. Maple
Leaf’s business transactions generate exchange rate risk between the Canadian dollar (CAD) and
the euro (EUR).
Maple Leaf is long a forward contract on EUR 50 million at 1.63 CAD/EUR, expiring in six months.
The current spot exchange rate is 1.64 CAD/EUR. The current rate in Canada is 3% and in Euro is 4.5%.
Compute the forward value to Maple Leaf.
I calculated the new forward price as 1.64* (1.03)^.5/1.045^.5 = 1.628187
To mean this says that according to the original forward contract, Maple Leaf will sell its Euros for $1.63 and according to the new forward contract, will be able to sell Euros for only $1.628187. Therefore, it has a gain of (1.63-1.628187)*50 million = 90,650/1.03^.5 = 89,314. This answer makes sense to me because the Canadian company will sell its Euros and get 1.63 for each euro (selling euros forward to hedge F/X risk). However, the solution says that the value to the Canadian company is actually -ve: -89,314. I have searched the threads but have not found any intuitive understandin. The Canadian company locked in a higher rate (1.63) for each euro. Had it waited it will get only 1.628187 for each euro. Isn’t the Canadian company better off by entering into the original forward contract?