1) What is a foreign exchange rate? What is the exchange rate risk?
2) A Detroit bank pays a 6% APR for a $100,000 six-month certificate of deposit, while a Windsor, Ontario bank advertises a rate of 7.5%. It costs approximately $50 in travel and forward contract commissions to invest in Canada, and the spot and 180 day forward rated on Canadian dollar are C$1.0000 = $0.8345 and C$1.0000 =$0.8225 respectively. Which CD should the Detroit investor take and why?