Question

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Based on the following table, calculate the forward discount (or forward premium) at which USD is...

Based on the following table, calculate the forward discount (or forward premium) at which USD is trading against CHF for a 6-month delivery. Which currency is trading at forward premium for a delivery in 3 months? Explain.

                                                              USD equivalent               Currency per USD

                CHF                                     1.0697                                                 0.9348

                        1-mos forward      1.0700                                               0.9346

                        3-mos forward      1.0705                                                0.9341

                        6-mos forward      1.0715                                               0.9333

                GBP                                     1.5733                                                0.6356

                        1-mos forward      1.5729                                                 0.6358

                        3-mos forward      1.5723                                                 0.6360

                        6-mos forward      1.5713                                                 0.6364

Solutions

Expert Solution

Calculating Forward premium(discount) of USD against CHF for 6 months delivery

Current spot rate of CHF/USD = S(CHF/USD) = 0.9348

6 month forward rate of CHF/USD = F6(CHF/USD) = 0.9333

As 6 month forward rate of CHF/USD is less that current spot rate of CHF/USD. so after 6 months it will take less no of CHF to buy a dollar as compared to today. Therefore USD is trading at forward discount against CHF for 6 month delivery

6 month Forward premium or discount = [F6(CHF/USD) - S(CHF/USD) ] / S(CHF/USD) = [ 0.9333 - 0.9348] / 0.9348

= -0.0015 / 0.9348 = -0.00160462 = -0.160462%

As value obtained is negative, so it is a discount, therefore USD is trading at forward discount of 0.160462% against CHF

Now we will find which currency is trading at premium for 3 months delivery

Current spot rate of CHF/USD = S(CHF/USD) = 0.9348

3 month forward rate of CHF/USD = F6(CHF/USD) = 0.9341

As 3 month forward rate of CHF/USD is less than current spot rate of CHF/USD, hence USD is trading at discount against CHF. We can say that CHF is trading at premium against USD

Current spot rate of GBP/USD for 3 month delivery = 0.6356, 3 month forward rate of GBP/USD = F6(CHF/USD) = 0.6360

As 3 month forward rate of GBP/USD is greater than current spot rate of GBP/USD, so USD is trading at premium against GBP.

Now we will find the discount or premium for CHF against GBP using cross rate formula

Current spot rate of CHF/GBP = Current spot rate of CHF/USD x current spot rate of USD/GBP = 0.9348 x 1.5733 = 1.4707

3 month forward rate of CHF/GBP = 3 month forward rate of CHF/USD x 3 month forward rate of USD/GBP = 0.9341 x 1.5723 = 1.4686

Since 3 month spot rate of CHF/GBP is less than current spot rate of CHF/GBP, so GBP is trading at discount against CHF. Or we can say CHF is trading at premium against GBP

We can see that for delivery in 3 month CHF is trading at par against both USD and GBP.

Hence we can say CHF is trading at premium for 3 month delivery.

jeff jeffy answered 4 months ago
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