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

2. 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:
% Change= ( )/ = %0.04
Predicted USD/CAD December 2009:
% Change= ( )/1.1522= %0.08

3. Purchasing Power Parity
CA Inflation rate: 1.9%
(SOURCE;
US Inflation rate: 1.8%
(SOURCE;
Inflation Rate Difference: = 0.1% or 0.01
Purchasing Power Parity:
X 0.01=
3month= /4=
6month= /2=
Exchange Rate September 2009: =
% Change= ( )/ = %
Exchange Rate December 2009: =
% Change= ( )/ = %

4. International Fischer Effect
Canadian govt. 1-2 year bond rate: 1.26%
(SOURCE:
US govt. 1 year bond rate: 4.5%
(SOURCE:
Interest Rate Difference: = 3.24% or
International Fischer Effect
1 year change 1.1531x0.0324=0.0374
1 year spot =1.116
Exchange Rate September 2009
6 month (0.0374/2)=1.134
% Change= ( )/1.134= 1.68%
Exchange Rate December 2009
3 month (0.0374/4)=1.144
% Change= ( )/1.144= 0.80%

5. 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
1.1522
1.1531
Purchasing Power Parity
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.

6. MNC-2 Open Short Positions
According to the Asset Choice Model
3 month rate:
6 month rate:
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

7. MNC-2 Open Long Positions
According to the Asset Choice Model
3 month rate:
6 month rate:
We would advise this MNC to hedge
Forecasted rates for 3 and 6 months rise from the spot rate of
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