An analyst for Credit Suisse in Zurich (Switzerland) receives the following quot

Question

An analyst for Credit Suisse in Zurich (Switzerland) receives the following quotes for Swiss franc and Thai baht (both against the dollar), for spot and six-month forward.Spot exchange rate:

franc to dollar SF 1.0875/$

baht to dollar Bt 31.2825/$

Six-month forward (quoted in terms of forward points):

franc to dollar -125 baht to dollar +700

(a) Calculate outright quotes for the six-month forward exchange rate of the franc and baht against the dollar.
(b) What is the baht to franc spot exchange rate (answer in terms of baht per franc)?
(c) What is the baht to franc six-month forward exchange rate (answer in terms of baht per franc)?
(d) Given your answer to part (b) and (c), what is the forward spread for the baht to franc rate? Does this forward spread reflect market expectations for depreciation or appreciation of the Swiss franc (against the Thai baht)?

(e) What is the annualized forward premium for the Swiss franc against the Thai baht?

Explanation / Answer

(a) Calculate outright quotes for the six-month forward exchange rate of the franc and baht against the dollar.

franc to dollar = SF 1.0875/$-125 bps=1.0875-0.0125=SF/$1.0750

baht to dollar= Bt 31.2825/$+700bps= 31.2825+0.07= Bt/$31.3525

(b) What is the baht to franc spot exchange rate (answer in terms of baht per franc)?

baht to franc spot= baht to dollar/ baht to dollar=31.2825/1.0875=28.7655

(c) What is the baht to franc six-month forward exchange rate (answer in terms of baht per franc)?

baht to franc six-month forward= baht to dollar(6 month forward)/ baht to dollar (6 month forward)

baht to franc six-month forward=31.3525/1.0750=29.1651

(d) Given your answer to part (b) and (c), what is the forward spread for the baht to franc rate? Does this forward spread reflect market expectations for depreciation or appreciation of the Swiss franc (against the Thai baht)?

Forward spread=29.1651-28.7655=0.3996=+3996bps

1 franc can buy 29.1615 bhat in 6 month, which has spot rate of 28.7655. Thus Swiss franc is expected to appreciate

(e) What is the annualized forward premium for the Swiss franc against the Thai baht?

Annualized premium = 6 month spread*2=3996*2=+7992bps

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