Currency Euro (EUR/USD) British pound (GBP/USD) Swiss franc (USD/CHF) Japanese y

Question

Currency Euro (EUR/USD) British pound (GBP/USD) Swiss franc (USD/CHF) Japanese yen (USD/JPY) Pakistani rupee (USD/PKR) Spot quote 1.1724 -1.1726 1.3387-1.3389 0.9836-0.9838 109.65-109.67 115.73-115.83 Part 2. Forward exchange rates -5-3, what are the 3-month forward bid and a. If the 3-month forward bid and ask quotes for the euro are ask exchange rates? ow many US dollars will a customer that enters a 3-month forward contract to sell 1 million to this dealer receive when the contract is settled in three months? c. If the 6-month forward bid and ask quotes for the Swiss franc are 8 11, what are the 6-month forward bid and ask exchange rates? d. How many US dollars will a customer that enters a 6-month forward contract to sell CHF 1 million to the dealer receive? e. Based on the spot and forward exchange rates, indicated whether the euro and the Swiss franc expected to strengthen or weaken over the next 3 and 6 months respectively?

Explanation / Answer

(a) Spot Rate 1 Euro = 1.1724 - 1.1726 USD . When the forward bid ask is given as -5 -3, we simple divide -5 and -3 by 10000 and add them to the spot bid ask. Hence the 3 month forward bid ask will be : (1.1724-5/10000) & (1.1726 - 3/10000) = 1.1719 & 1.1723

(b) As per the dealer's 3 month forward quote 1.1719 - 1.1723, the dealer is willing to buy Euro at 1.1719 and sell Euro 1.1723 . Hence the customer wanting to convert Euro 1 million will receive (1000000 * 1.1719) = USD 1,171,900.

(c) Spot rate 1 USD = 0.9836 - 0.9838 CHF. When the forward bid ask is given as 8 11, we simple divide 8 and 11 by 10000 and add them to the spot bid ask. Hence the 6 month forward bid ask will be : (0.9836+8/10000) & (0.9838 + 11/10000) = 0.9844 & 0.9849

(d) At the dealer's 6 month forward rate of 0.9844 - 0.9849, the dealer is willing to buy USD at 0.9844 and sell USD at 0.9849 or conversely buy CHF at (1/0.9849) = 1.0153 and sell CHF at (1/0.9844) = 1.0158. Hence the customer wanting to sell CHF 1 million will receive (1000000 * 1.0153) = USD 1,015,300

(e). Given the forward rates, we see that the Euro is expected to weaken in 3 months time since the amount of dollars we receive per Euro decreases as per the forward rate. In case of CHF we see that CHF is also expected to weaken against the USD since the amount of CHF currency we get per dollar increases in 6 months time.

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