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Questions and Answers
What can be inferred from the spot and forward rate quotations for the Swiss franc?
What can be inferred from the spot and forward rate quotations for the Swiss franc?
- The forward premium is zero.
- The forward premium is undefined.
- The forward premium is negative.
- The forward premium is positive. (correct)
What is the relationship between the spot rate and the forward rate in the given quotations?
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. (correct)
- The spot rate and the forward rate are equal.
- The relationship cannot be determined.
- The forward rate is lower than the spot rate.
What can be said about the Swiss franc in the forward market?
What can be said about the Swiss franc in the forward market?
- It is at a premium. (correct)
- It is at par.
- It is at a discount.
- It is impossible to determine.
What is the implication of a positive forward premium for the Swiss franc?
What is the implication of a positive forward premium for the Swiss franc?
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What is the forward premium a reflection of?
What is the forward premium a reflection of?
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What is the significance of the forward premium in the given quotations?
What is the significance of the forward premium in the given quotations?
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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.
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