Foward Quote Problem Use the exchange rates in the table to answer the questions
ID: 2729964 • Letter: F
Question
Foward Quote Problem
Use the exchange rates in the table to answer the questions.
American Term
European Term
Swiss Franc
0.9036
1.1067
1-month forward
0.9052
1.1047
3-month forward
0.9077
1.1017
(a) Is Swiss Franc trading at premium or discount vs. USD in the forward market?
(b) Calculate the 1-month forward premium/discount using European Term (30 days).
(c) Suppose you long a 3-month forward contract on Swiss Franc, worth SF 1,000,000 at the above forward rate. At maturity date, you check the spot exchange rate, S(USD/SF) = 0.9125. State your profit/loss in USD from the forward transaction at maturity date.
American Term
European Term
Swiss Franc
0.9036
1.1067
1-month forward
0.9052
1.1047
3-month forward
0.9077
1.1017
Explanation / Answer
Requirement 1:
Premium or discount in forward market in terms of USD:
Spot rate = 0.9036
1 month forward rate = 0.9052
3 month forward rate = 0.9077
1 month forward: Swiss Franc trades at premium.
3 month forward: Swiss Franc is trading at premium
Requirement 2:
1 month forward premium/ discount using European term
= 1 month forward rate – Spot Rate
= 1.1047 – 1.1067
= -0.002
Requirement 3:
3 month forward Contract: Realizations = SF 1000000 * 0.9077 = $907700
Value as on maturity date = SF 1000000 * 0.9175 = $917500
Profit from forward transaction
= $907700 - $917500
= -$9800
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