Problem 20-3 Forward Exchange Rates Suppose we have the following exchange rate

Question

Problem 20-3 Forward Exchange Rates

Suppose we have the following exchange rate quotes:

The six-month forward rate for the Japanese yen is  per U.S. dollar. The yen is selling at a (Click to select)premiumdiscount because it is (Click to select)moreless expensive in the forward market than in the spot market. (Do not round intermediate calculations and round your final answer to 2 decimal places (e.g., 32.16).)

The six-month forward rate for British pound is  per U.S. dollar. The pound is selling at a (Click to select)premiumdiscount because it is (Click to select)moreless expensive in the forward market than in the spot market. (Do not round intermediate calculations and round your final answer to 4 decimal places (e.g., 32.1616).)

Based on the information in the figure, the value of the U.S. dollar will (Click to select)risefall with respect to the yen and will (Click to select)fallrise with respect to the pound.

Suppose we have the following exchange rate quotes:

Explanation / Answer

a) The six-month forward rate for the Japanese yen is per U.S. dollar. The yen is selling at a premium because it is more expensive in the forward market than in the spot market.
Reason: Japanese Yen to Dollar is less in the forward market which means Dollar is decreasing and Yen will increase in the future.

b) The six-month forward rate for British pound is per U.S. dollar. The pound is selling at a discount because it less expensive in the forward market than in the spot market.
Reason: In the forward market, pound to dollar is more which means dollar is increasing and pound is decreasing in the future.

c) the value of the U.S. dollar will fall with respect to the yen and will rise with respect to the pound.

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