Chapter 2: Part 2
Foreign Exchange Market Forward Market
1.
Direct Quotation on the Dollar. Calculate the forward discount on the dollar (the dollar is the home currency) if the
spot rate is $1.5800/ and the six-month forward rate is $1.5550/.
Formula for direct quotation:
2.
Indirect Quotation on the Dollar. Calculate the forward premium on the dollar (the dollar is the home currency) if the
spot rate is 1.3300/$ and the three-month forward rate is 1.3400/$.
Formula for indirect quotation:
3.
Forward Premiums on the Japanese Yen. Use the following spot and forward bid-ask rates for the U.S. dollar/ Japanese
yen/ ($/ or 1$ = X ) exchange rate from September 16, 2010, to answer the following questions:
[This is direct or indirect quote on the Dollar?]
Period
spot
1 month
2 months
3 months
6 months
12 months
24 months
$/
Bid Rate
85.41
85.02
84.86
84.37
83.17
82.87
81.79
$/
Ask Rate
85.46
85.05
84.90
84.42
83.20
82.91
81.82
a. What is the mid-rate for each maturity?
b. What is the annual forward premium for all maturities?
c. Which maturities have the smallest and largest forward premiums?
4.
Forward Premiums on the Euro. Use the spot and forward bid-ask rates for the euro/ U.S. dollar (/$ or 1 = X $)
exchange rate from December 10, 2010 below, to answer the following questions:
a. What is the mid-rate for each maturity?
b. What is the annual forward premium for all maturities?
c. Which maturities have the smallest and largest forward premiums?
[This is direct or indirect quote on the Dollar?]
Period
spot
1 month
2 months
3 months
6 months
12 months
24 months
/$
Bid Rate
1.3231
1.3230
1.3228
1.3224
1.3215
1.3194
1.3147
/$
Ask Rate
1.3232
1.3231
1.3229
1.3227
1.3218
1.3198
1.3176
5.
Trading in Zurich. Andreas Broszio just started as an analyst for Credit Suisse in Zurich, Switzerland. He receives the
following quotes for Swiss francs against the dollar for spot, one-month forward, three-months forward, and six-months
forward.
Spot exchange rate:
Bid rate SF 1.2575/$
Ask rate SF 1.2585/S
One-month forward 10 to 15
Three-months forward 14 to 22
Six-months forward 20 to 30
a. Calculate outright quotes for bid and ask, and the number of points spread between each.
b. What do you notice about the spread as quotes evolve from spot toward six months?
Answers
How to determine if a currency is traded at a premium or at a discount?
Calculate the forward point (forward point = F S).
If forward point > 0, the base currency is traded at a premium; If forward point is < 0, the base currency is
traded at a discount.
1.
Direct quote on the Dollar
Spot:
/$ = 1.5800
6-m forward:
/$ = 1.5550
Check: Indirect quote on the Dollar
Spot:
/$ = 1.5800 => $/ = 0.6329
6-m forward:
/$ = 1.5550 => $/ = 0.6431
Forward point = 1.5550 1.5800 = - 0.025
is traded at a discount or $ is traded at a
premium.
f () =
2.
= - 3.16 %
Forward point = 0.0102
$ is traded at a premum or is traded at a
discount
f () =
= -3.16%
Indirect quote on the Dollar
Spot:
$/ = 1.3300
3-m forward:
$/ = 1.3400
Check: Direct quote on the Dollar
Spot:
$/ = 1.3300 => /$ = 0.7519
3-m forward:
$/ = 1.3400 => /$ = 0.7463
Forward point = 1.3400 1.3300 = 0.01
$ is traded at a premium or is traded at a
discount.
f ()=
= -2.9851
Forward rate: 0.7463 0.7519 = - 0.0056
is traded at a discount or $ is traded at a
premium
f () =
= -2.9851
3.
Note: Indirect quote on the Dollar
Forward point: (1-month) (85.035 85.435) = -0.4 => $ is traded at a discount or and is traded at a premium.
$/
$/
$/
Bid Rate
Ask Rate
Mid Rate
spot
85.41
85.46
85.43500
1 month
85.02
85.05
85.03500
5.6447%
2 months
84.86
84.90
84.88000
3.9232%
3 months
84.37
84.42
84.39500
4.9292%
6 months
83.17
83.20
83.18500
5.4096%
12 months
82.87
82.91
82.89000
3.0703%
24 months
81.79
81.82
81.80500
2.2187%
Period
4.
$/
Forward
premium
Note: Direct quotation on the Dollar
Forward point: (1-month) (1.32305 1.32315) = - 0.0001 => is traded at a discount or $ is traded at a premium.
Period
spot
1 month
2 months
3 months
6 months
12 months
24 months
/$
Bid Rate
1.3231
1.3230
1.3228
1.3224
1.3215
1.3194
1.3147
/$
Ask Rate
1.3232
1.3231
1.3229
1.3227
1.3218
1.3198
1.3176
/$
Mid Rate
1.32315
1.32305
1.32285
1.32255
1.32165
1.31960
1.31615
/$
Forward premium
-0.0907%
-0.1360%
-0.1814%
-0.2267%
-0.2683%
-0.2645%
5.
a. Calculate outright quotes
Bid
Ask
Spread
One-month forward
1.2585
1.2600
0.0015
3-months forward
1.2589
1.2607
0.0018
6-months forward
1.2595
1.2615
0.0020
b. What do you notice about the
spread?
It widens, most likely a result of thinner and thinner trading
volume.
