Spot and forward rates. Suppose the exchange rate for the Swiss franc is quoted
ID: 2761214 • Letter: S
Question
Spot and forward rates. Suppose the exchange rate for the Swiss franc is quoted as SF 1.50 in the spot market and SF in the 90-day forward market. A. Is the dollar selling at a premium or discount relative to the franc? B. Does the financial market expect the franc to strengthen relative to the dollar? C. What do you suspect is true about relative economic conditions in the United States and Switzerland?Spot and forward rates. Suppose the exchange rate for the Swiss franc is quoted as SF 1.50 in the spot market and SF in the 90-day forward market. A. Is the dollar selling at a premium or discount relative to the franc? B. Does the financial market expect the franc to strengthen relative to the dollar? C. What do you suspect is true about relative economic conditions in the United States and Switzerland?
A. Is the dollar selling at a premium or discount relative to the franc? B. Does the financial market expect the franc to strengthen relative to the dollar? C. What do you suspect is true about relative economic conditions in the United States and Switzerland?
Explanation / Answer
a. The dollar is selling at a premium, if it is more expensive in the forward market than in the spot market (SF 1.53 versus SF 1.50).if doolar is selling at a discount if it is cheap in the forward market than in the spot market and if there is no change in forward and spot market there is no change in par value.
b. The franc is expected to depreciate relative to the dollar, because it will take more francs to buy one dollar in the future than it does today. if dollar is selling at discount The franc is ecpected to appreciate relative to dollar because it will tale less francs to buy one dollarin the future than it does today. if no change in forward and spot rates, value of franc will held constant.
c. Inflation in Switzerland is higher than in the United States, as are interest rates. but if dollar is at discount the rate of inflation is low in the switzerland.
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.