Question

question 3 and 4(just part C)

Thank you.

3. Forward Exchange Rates If the $/€ spot rate is $1.14/€ and three-month fc $1.15/€? Is the dollar selling at a premium or a discount? Explain.

Answer 1

(3) Current Spot Rate = $ 1.14 / pound and 3-Month Rate = $ 1.15 / Pound

As is observable, 1 Pound can buy more $ 3-Months later as compared to now. This implies that the $ depreciates against the Pound over a period of time. Hence, the $ is selling at a discount.

(4) (c) Current Rate = R15/Pound and 6-Month Rate = R16 / Pound

Again, as is observable 1 Pound can buy more Rand 6-Months later as compared to now. Conversely, more rand will be required to purchase 1 Pound 6-Months later as compared to now. Hence, the Pound again appreciates relative to the Rand and therefore, the Pound is selling at a premium.