6 Questions
What can be inferred from the spot and forward rate quotations for the Swiss franc?
The forward premium is positive.
What is the relationship between the spot rate and the forward rate in the given quotations?
The forward rate is higher than the spot rate.
What can be said about the Swiss franc in the forward market?
It is at a premium.
What is the implication of a positive forward premium for the Swiss franc?
The Swiss franc is expected to appreciate.
What is the forward premium a reflection of?
Market expectations of the Swiss franc's value.
What is the significance of the forward premium in the given quotations?
It indicates market expectations of the Swiss franc's appreciation.
Study Notes
Exchange Rates and Quotations
- The indirect quote from the U.S. perspective is €0.6250 = $1.00, meaning that 1 USD can be exchanged for 0.6250 EUR.
- The direct quote for Pound Sterling is $1.25/£1.00, indicating that 1 GBP can be exchanged for 1.25 USD.
- The cross-exchange rate for Pound Sterling and Euro is €0.80/£1.00, implying that 1 GBP can be exchanged for 0.80 EUR.
Forward Premium
- When a currency trades at a premium in the forward market, it means that the forward exchange rate is more than the spot exchange rate.
- For example, if the spot exchange rate is €1.00 = $1.00, a forward exchange rate of €1.00 = $1.28 indicates a premium.
Forward and Spot Rates
- Given the spot and forward rate quotations for the Swiss franc, the forward rate is higher than the spot rate, indicating a premium.
This quiz is about calculating the exchange rate from the US perspective. It involves converting euros to dollars and understanding the indirect quote.
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