On Tremblay Candidate Resources test 1 question 1 they ask Using Exhibit 1, the mid-market forward premium (discount) for a 90-day contract for CAD/USD is closest to:
Exhibit 1
Selected Currency Exchanges and Market Rates
Country
Currency
Spot Exchange Ratea
One Year Risk-free Rate
Expected Annual Inflation Rate
United States
US$
NA
4.80%
2.30%
Canada
C$
1.2138–1.2259
4.10%
1.90%
Brazil
Real (BRL)
2.3844–2.4082
8.80%
6.30%
Ecuador
US$b
NA
6.40%
4.50%
aNumber of foreign currency units per one U.S. dollar.
My instincts tell me to find the mid point and multiply by (1.041 ^(90/360)/1.048^(90/360))
the answer says 1.21985 c$/US$ x (90/360/(1.048(90/360) x (.041 - .048)
so midpoint x (n/360 / 1+rf (n/360)) x (rd - rf)
can someone explain the logic behind the equation used?