What is meant by the three-month forward exchange rate?

Solutions

Expert Solution

* Forward exchange rate is used to represent the current expectations of future currency exchange rate.

* Three-month forward exchange rate refers to an exchange rate to which both the parties in a forward currency exchange contract agree to exchange one currency for another at a future date (three months from the day of contract initiation).

* These rates can be used by multinational companies to hedge their currency risk. Suppose a company expects a payment in foreign currency after 3 months, it may be vulnerable to fluctuations of currency within these 3 months. Hence it can enter into a forward contract (3 months maturity) and lock in a rate today to hedge it's position.

* Forward Exchange Rate can be determined using the interest rate parity condition. Let 'S' be the spot rate (domestic is the base currency, foreign currency being quoted), 'F' be the forward rate, i_d be the domestic interest rate & i_f be the interest rate of the foreign currency..

F = S * [1 + i_d * (t/360)]/[1 + i_s * (t/360)]

3 month forward rate (F) = S * [1 + i_d * (90/360)]/[1 + i_s * (90/360)]

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

Currently, the spot exchange rate is €_/$ and the three-month forward exchange rate is €_/$ (Please...

Currently, the spot exchange rate is €_____/$ and the three-month forward exchange rate is €_____/$ (Please refer to the assigned figures in Table 3 below). The three-month interest rate is 2.8% per annum in the U.S. and 1.6% per annum in France. Assume that you can borrow as much as $1,000,000 or €__________(Please refer to the assigned figures in Table 1 below). a. Determine whether the interest rate parity is currently holding. If the IRP is not holding, how would...

Currently, the spot exchange rate is $1.52/£ and the three-month forward exchange rate is $1.54/£. The...

Currently, the spot exchange rate is $1.52/£ and the three-month forward exchange rate is $1.54/£. The three-month interest rate is 5.84% per annum in the U.S. and 5.84% per annum in the U.K. Assume that you can borrow as much as $1,500,000 or £1,000,000. If the IRP is not holding, determine the arbitrage profit in British Pound. Otherwise input your answer as 0 PS: Please input your answer without any currency information.

Currently, the spot exchange rate is $1.50/£ and the three-month forward exchange rate is $1.52/£. The...

Currently, the spot exchange rate is $1.50/£ and the three-month forward exchange rate is $1.52/£. The three-month interest rate is 8.0% per annum in the U.S. and 5.8% per annum in the U.K. Assume that you can borrow as much as $1,500,000 or £1,000,000. Calculate your arbitrage profit in USD

Currently, the spot exchange rate is $1.52/£ and the three-month forward exchange rate is $1.54/£. The...

Currently, the spot exchange rate is $1.52/£ and the three-month forward exchange rate is $1.54/£. The three-month interest rate is 5.84% per annum in the U.S. and 5.84% per annum in the U.K. Assume that you can borrow as much as $1,500,000 or £1,000,000. Your final answer should be in dollars. If the IRP is not holding, determine the arbitrage profit. Otherwise input your answer as 0 PS: Please input your answer without any currency information.

Suppose that the current exchange rate is SF1.25/$ and three month forward exchange rate is SF1.30/$....

Suppose that the current exchange rate is SF1.25/$ and three month forward exchange rate is SF1.30/$. The three-month interest rate is 4 percent per annum in United States and 8 percent per annum in Switzerland. Assume that you can borrow up to $1,000,000 or SF 1,250,000. a) Is Interest Rate Parity holding? b) If your answer to part a is no, how would you realize a certain profit via a covered interest arbitrage? Also determine the size of the arbitrage...

Suppose that the current exchange rate is SF1.25/$ and three month forward exchange rate is SF1.30/$....

The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. You are...

The current spot exchange rate is $1.55/€ and the three-month forward rate is $1.50/€. You are selling €1,000 forward for $. How much in $ are you receiving in three months? If the spot exchange rate is $1.60/€ in three months, how much is the gain or loss from this forward hedge?

The current spot exchange rate is $1.45/€ and the three-month forward rate is $1.55/€. Based on...

The current spot exchange rate is $1.45/€ and the three-month forward rate is $1.55/€. Based on your economic forecast, you are pretty confident that the spot exchange rate will be $1.50/€ in three months. Assume that you would like to buy or sell €100,000. a) List and discuss what actions would you take to speculate in the forward market (take a short or long position and why) b) Critically discuss what is the expected dollar profit from speculation c) If...

The current exchange rate is 1.50 $/€, and 3-month forward exchange rate is 1.55 $/€. The...

The current exchange rate is 1.50 $/€, and 3-month forward exchange rate is 1.55 $/€. The 3-month interest rate in US is 5%, and the 3-month interest rate in France is 3%. Assume you are a trade who demands 1 million Euro in 3 months. 2. Please explain the foreign exchange rate risk that you face. (no more than 100 words) 3. Please describe how to use the forward contract to hedge the risk. (no more than 100 words) 4....

The current spot exchange rate is $1.70/£ and the three-month forward rate is $1.71/£. You believe...

The current spot exchange rate is $1.70/£ and the three-month forward rate is $1.71/£. You believe that the spot exchange rate will be $1.69/£ in three months. (1) What actions do you need to take to speculate in the forward market? What is the expected dollar profit from speculation? Assume that you would like to buy or sell £1,000,000 forward. (2) What is your dollar profit if the spot exchange rate turns out to be $1.79/£ in three months? (3)...

Subjects