Matt Bennett Grant Lynch Lainie Vi CAD Forcast Matt Bennett Grant Lynch Lainie Vi

Asset Choice Model Spot USD/CAD: 1.1531 But… After declines in 2009, core inflation and total CPI inflation are projected to gradually return to 2 per cent in the third quarter of 2011. Interest Rate Reaction- Raise interest rate to counter inflation But… 6/8/2009 Canadian Finance Minister announces that he believes a global economic recovery isn't "far behind" and that Canada will "lead the way". Commodities Safehaven Effect Low political/country risk Canadian real GDP is projected to decline by 3.0 per cent in 2009 and to grow by 2.5 per cent in 2010  Increase demand for Loonie Predicted USD/CAD September 2009: 1.15265 % Change= (1.1531-1.15265)/1.15265= %0.04 Predicted USD/CAD December 2009: 1.1522 % Change= (1.1531-1.1522)/1.1522= %0.08

Purchasing Power Parity CA Inflation rate: 1.9% (SOURCE; http://www.consensuseconomics.com/) US Inflation rate: 1.8% (SOURCE; http://www.forecast-chart.com/forecast-inflation-rate.html) Inflation Rate Difference: 1.9-1.8 = 0.1% or 0.01 Purchasing Power Parity: 1.1531 X 0.01= 0.01153 3month= 0.01153/4= 0.00288 6month= 0.01153/2= 0.00576 Exchange Rate September 2009: 1.1531 + 0.00288= 1.15598 % Change= (1.1531-1.15598)/1.15598= -0.249% Exchange Rate December 2009: 1.1531 + 0.0057= 1.15886 % Change= (1.1531-1.15886)/1.15886= -0.497%

International Fischer Effect Canadian govt. 1-2 year bond rate: 1.26% (SOURCE: http://www.bankofcanada.ca/en/rates/bonds.html) US govt. 1 year bond rate: 4.5% (SOURCE: http://www.bllomberg.com/markets/rates/index.html/) Interest Rate Difference: 0.045-0.0126= 3.24% or 0.0324 International Fischer Effect 1 year change 1.1531x0.0324=0.0374 1 year spot 1.1531-0.0374=1.116 Exchange Rate September 2009 6 month 1.1531-(0.0374/2)=1.134 % Change= (1.1531-1.134)/1.134= 1.68% Exchange Rate December 2009 3 month 1.1531-(0.0374/4)=1.144 % Change= (1.1531-1.144)/1.144= 0.80%

Asset Choice Model coincides with Bank of Canada graph. Group Recommendation Forecast Model 3 month rate 6 month rate June 26 Spot Rate Asset Choice Model 1.15265 1.1522 1.1531 Purchasing Power Parity 1.15598 1.15886 Fischer Effect 1.134 1.144 PPP- inconsistent with Bank predictions- difference in inflation is .1% and the depreciation of the currency is too dramatic to be believable IFE- high difference in interest rate for bonds. Too large of a change to be beleivable. Asset Choice Model- matches Bank of Canada predictions. Asset Choice Model coincides with Bank of Canada graph.

MNC-2 Open Short Positions According to the Asset Choice Model 3 month rate: 1.15265 6 month rate: 1.1522 We would advise this MNC not to hedge Forecasted rates for 3 and 6 months drop from the spot rate of 1.153 It will take less Loonies to pay for the account Advice: If Loonie continues to rise there is no need to hedge If Loonie is strong than the foreign currency is weak

MNC-2 Open Long Positions According to the Asset Choice Model 3 month rate: 1.15265 6 month rate: 1.1522 We would advise this MNC to hedge Forecasted rates for 3 and 6 months rise from the spot rate of 1.1531 The MNC will receive less Loonies on the account receivable with a weaker foreign exchange currency Advice: Forward Contact We want to lock in our currency since it is forecasted to strengthen No Options Forecasted rise in CAD rates is not too significant and it would be too expensive to purchase a call option