Question

Spot and 90-day forward exchange rates for several major currencies are shown below. For each pair, calculate the percentage forward premium or discount, expressed at an annual rate. So, what do you think the prospects of the different currencies are?

Currency	Spot rate, as of 9/26	90-day Forward, as of 9/26
Euro (EUR)	$1.1468/EUR	$1.1454/EUR
Swiss Franc (SF)	SF 1.3425/$	SF 1.3395/$
Japanese Yen (JPY)	¥ 111.83/$	¥111.6615/$
British Pound (GBP)	$1.65955/GBP	$1.6488/GBP

Hint: Use the following rules

Direct quotes: fhome = [(Forward – Spot)/Spot] * (360/days) * 100

Indirect quotes: fforeign = [(Spot – forward)/Forwards] * (360*days) * 100

Answer 1

Solution:-

a) For Euro dollar pair.

Premium or discount of Euro= [(Forward – Spot)/Spot] * (360/days) * 100

                                                =[(1.1454-1.1468)/1.1468]*(360/90)*100

                                                =-0.4883%

Hence the Euro is at discount of 0.4883% annually.

Premium or discount of Dollar

            = [(Spot – forward)/Forwards] * (360*days) * 100

            =[(1.1468-1.1454)/1.1454]*(360/90)*100

            =0.4889%

Hence the dollar is at the premium of 0.4889% with reference to Euro.

b) For Swiss Franc and dollar pair

Premium or discount of Dollar= [(Forward – Spot)/Spot] * (360/days) * 100

                                                =[(1.3395-1.3425)/1.3425]*(360/90)*100

                                                =-0.8939%

Hence the Dollar is at discount of 0.8939% annually.

Premium or discount of Swiss Franc

            = [(Spot – forward)/Forwards] * (360*days) * 100

            =[(1.3425-1.3395)/1.3395]*(360/90)*100

            =0.8959%

Hence the Swiss Franc is at the premium of 0.8959% with reference to Dollar.

c) For Japanese Yen and Dollar pair :-

Premium or discount of Dollar= [(Forward – Spot)/Spot] * (360/days) * 100

                                                =[(111.6615-111.83)/111.83]*(360/90)*100

                                                =-0.6027%

Hence the Dollar is at discount of 0.6027% annually.

Premium or discount of Japanese Yen

            = [(Spot – forward)/Forwards] * (360*days) * 100

            =[(111.83-111.6615)/111.6615]*(360/90)*100

            =0.6036%

Hence the Japanese Yen   is at the premium of 0.6036% with reference to Dollar.

d) For British pound and Dollar pair

Premium or discount of GBP= [(Forward – Spot)/Spot] * (360/days) * 100

                                                =[(1.6488-1.65955)/1.65955]*(360/90)*100

                                                =-2.5911%

Hence the GBP is at discount of 2.511% annually.

Premium or discount of Dollar

            = [(Spot – forward)/Forwards] * (360*days) * 100

            =[(1.65955-1.6488)/1.6488]*(360/90)*100

            =2.6080%

Hence the Dollar is at the premium of 2.6080% with reference to GBP.

Future prospectus:-

For Dollar:- The Dollar will stronger with respect to British pound, Euro in future however it will be weaker with respect to Swiss franc and Japanese Yen

For Euro:- Euro will be weaker than dollar in future.

For Swiss Franc:= Swiss franc will be stronger with reference to Dollar.

For Japanese yen:- Japanese Yen will be stronger in future in reference to Dollar

For British pound:- British pound will be weaker in future with reference to Dollar.