4. Trading in foreign exchange As Aa What are spot rates and forward rates? Supp

Question

4. Trading in foreign exchange As Aa What are spot rates and forward rates? Suppose you open the newspaper today and observe the fo lowing indirect exchange rate quotations for the British pound: Spot Exchange Rates 0.5401 30 Days 0.5423 Forward Exchange Rates 60 Days 0.5439 90 Days British pound (pound / dollar) 0.5445 The British pound is selling at a in the forward market. discount Suppose y you in British pounds, but your company is based in the United States, so you are most concerned with the dollar value of the payment. If the customer pays you £600,000 today, how much is that worth in dollars? days to pay you in cash. The customer will pay O $1,110,905 O $1,166,450 O $777,634 O $1,055,360 Assume that the forward market is the spot exchange rate 60 days from now. If the customer waits the full 60 days and have you lost cin dollar terms) due to exchange rate fluctuations? corract and the 60-day forward exchange rate quoted in the newspaper today is days from now. If the customer waits the full 60 days and pays you L600,000, how much O $6,597 O $7,761

Explanation / Answer

Since, British pound to dollar exchange rate is increasing; it is selling at discount in forward market.

Loss:

= 600,000 pounds÷0.5401-600,000÷0.5439

= $7,761

Value today:

= 600,000 pounds÷0.5401

= $1,110,905

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