You start working for a US company based in Cleveland. Your company has export-i

Question

You start working for a US company based in Cleveland. Your company has export-import transactions with a few businesses in Switzerland and you handle all such international transactions. Your company is a valued client of a major local bank and the bank sends the exchange rates daily to your office via email. You pull out the bills due for collection (accounts receivable) and payments (accounts payable) today and start reading the following outright quotes for Swiss Francs against the dollar (CHF/$) from your bank.

Is the Swiss franc (CHF) poised to become strong or weak against the dollar between now and future?

What would you receive if you sold CHF 1,000,000 million spot?

Are you an exporter or importer in this transaction?

What would it cost for you to purchase CHF 500,000 three-months forward?

Are you an exporter or importer in this transaction?

Using mid-rates, calculate the annualized premium or discount for Swiss Francs against the dollar for 3-Month Forward. Use negative sign for discount

CHF /S BidAsk Rates Spot M Fwd 1.6085 1.61 1.6075 1.6085 1.6100 1.6107 1.6115 3 M Fwd 1.6089 6 MFwd 1.6095

Explanation / Answer

a) To ascertain whether Swiss franc (CHF) is poised to become strong or weak against the dollar between now and future-

Step 1: Change the exchange rates in $ / CHF format, that is CHF being the product in the exchange rates.

Step 2: Compute swap points.

Analysis: Where swap points are in Ascending order, the product (here CHF) is Appreciating. On the other hand where swap points are in Descending order, the product (here CHF) is Depreciating.

Step 1: Outright quotes in $ / CHF format

Step 2: Swap Points (Forward – Spot)

1 M Fwd               0.0006 - 0.0004

3 M Fwd               0.0009 – 0.0006

6 M Fwd               0.0012 – 0.0008

Analysis: In all the cases swap points are in descending order, CHF is depreciating, it is poised to become weak against the dollar.

Note: Swap points do not have negative sign. It is the difference between forward and spot rate in absolute terms.

b) Spot $ / CHF is 0.6217 – 0.6221

     In the given case company sold CHF, so bank buys CHF, hence Bid is relevant. So the company receives $160,850 million (1 million/0.6217)

c) In this transaction company is an Exporter.

d) 3 M Fwd $ / CHF is 0.6208 – 0.6215

In the given case company purchase CHF, so bank sells CHF, hence Ask is relevant. So the company       need to pay $310,750 (500,000*0.6215)

e) In this transaction company is an Importer.

f)

Mid Rate (Spot) 0.6219 [(0.6217+0.6221)/2]

Mid Rate (3 M Fwd)        0.6212 [(0.6208+0.6215)/2]

Premium/Discount for Swiss franc can be calculated as follows

(0.6212-0.6219)/0.6219 * 12/3 *100

-0.45 %

Rates Bid [1/(Ask CHF/$)] Ask [1/(Bid CHF/$)] Spot 0.6217 0.6221 1 M Fwd 0.6211 0.6217 3 M Fwd 0.6208 0.6215 6 M Fwd 0.6205 0.6213

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