The Wall Street Journal reported the following spot and forward rates for the Sw

Question

The Wall Street Journal reported the following spot and forward rates for the Swiss franc ($/SF) in June of 2009.

Spot     

$0.8466

30-day forward

$0.8504

90-day forward

$0.8540

180-day forward           

$0.8587

  a.         Was the Swiss franc selling at a discount or premium in the forward market?

            b.         What was the 30-day forward premium (or discount)?

            c.          What was the 90-day forward premium (or discount)?

Spot     

$0.8466

30-day forward

$0.8504

90-day forward

$0.8540

180-day forward           

$0.8587

Explanation / Answer

A forward discount means the market expects the domestic currency to depreciate against another currency Since, franc is expected to appreciate, dollar is expected to depreciate. Hence, Frank is selling at a premium in the forward market! = answer a.

b. 30-day forward premium = ($0.8504 - $0.8466)/$0.8466 = 0.449% premium

c. 90-day forward premium = ($0.8540 - $0.8466)/$0.8466 = 0.874% premium

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