Question

Spot Question 2 Given below are spot and forward rates expressed in US dollars per unit of the Euro and £ Rates 1.5393 1.6030 30 days forward 1.5406 1.6006 60 days forward 1.5425 1.6000 90 days 1.5431 1.5945 180 days 1.5478 1.5859 Required: i. Is the 90-day forward € quoted at a discount or at a premium? ii. Is the 90-day forward contract in pound trading at a discount or at premium? iii. Relative to the pound is the 180 - day forward dollar quoted at a discount? iv. Relative to the Euro is the 90-day forward dollar quoted at a discount?

Answer 1

Answers to the following        i) the 90 day forward € is quoted at discount because F>S( i.e.,1.5431>1.5393) here € is the price and $ is the product USD is appreciating and EUR is depreciating and is hence said to be trading at discount to the dollar.   ii) the 90 day forward contract in pound is trading at a premium as F<S 1.5945<1.6030 because in the forward market price I.e., £ is appreciating and the product that is $ is depreciating. iii)180 days forward discount =(F-S)/S)*(360/180)*(100) we get [(1.5859-1.6030)/1.6030]×(360/180)×100)= -2.133%. iv)90 day forward discount =(F-S)/S)*(360/90)*100 on substitution we get[(1.5431-1.5393)/1.5393)*(360/90)*100] =0.987%