Question

Assume that the foreign currency (F) has been quoted against the £ as follows :

Spot rate £1: F2256 – 2266

£1: F2307 – 2322

3 months forward rate

Required:

1. Determine the amount required in sterling pound to buy 1 million foreign currencies

1. At the spot

2. In 3 months’ time under the forward exchange contract.

2. Compute the amount a customer would get if he were to sell 1 million foreign currency

3. 
   

1. At the spot rate

4. 
   

2. In 3 months’ time under forward exchange contract

Answer 1

Facts

	Bid Rate	Ask Rate
Spot(F/£)	F 2256	F 2266
3 Month Forward Rate(F/£)	F 2307	F 2322

a. Amount required in sterling pound to buy 1 Million foreign currency

i. at spot

Ask Rate

F 1 = £ 1/2256

F 1 Million = £ 1 Million * (1/2256) = £ 443.2624

Amount required in sterling pound to buy 1 Million foreign currency(at spot) = £ 443.2624

ii, at Forward rate

Ask Rate

F 1 = £ 1/2307

F 1 Million = £ 1 Million * (1/2307) = £ 433.4634

Amount required in sterling pound to buy 1 Million foreign currency(at forward) = £ 433.4634

b. Amount customer would get if he were to sell 1 Million foreign currency

i. at spot

Bid Rate

F 1 = £ 1/2266

F 1 Million = £ 1 Million *(1/2266) = £ 441.3063

Amount customer would get if he were to sell 1 Million foreign currency(at spot) = £ 441.3063

ii. at Forward rate

Bid Rate

F 1 = £ 1/2322

F 1 Million = £ 1 Million *(1/2322) = £ 430.6632

Amount customer would get if he were to sell 1 Million foreign currency(at forward) = £ 430.6632