Question

The following quotations are given for the spot rate and the 1-month, 3-moth ad 6-month absolute swap rates involving the US$ and the Euro (€):

Spot rate
1.0904 Bid ($/€)
1.0910 Ask ($/€)

1-month absolute swap
0.0219 Bid ($/€)
0.0224 Ask ($/€)

3-month absolute swap
0.0463 Bid ($/€)
0.0472 Ask ($/€)

6-motnh absolute swap
0.0578 Bid ($/€)
0.0587 Ask ($/€)

Calculate forward quotes for the US $ dollar as: a) outright forward quotes, and b) annual percentage premium or discount. Explain whether or not the forward rates can be reliable forecasts of future spot rates.

Answer 1

Forward Points	Bid	Ask
1-month	0.0219	0.0224
3-month	0.0463	0.0472
6-month	0.0578	0.0587

(a) Forward quote = Spot rate + Forward points

Forward Quote	Bid	Ask
Spot	1.0904	1.091
1-month	1.1123	1.1134
3-month	1.1367	1.1382
6-month	1.1482	1.1497

(b) Forward Quotes in terms of annual percentage premium or discount are calculated as:

Annualized forward premium = [(forward exchange rate - spot rate) ÷ spot rate] * 360/n

where n = 30/ 90/ 180

Annualized forward premium	Bid	Ask
1-month	24.10%	24.64%
3-month	16.98%	17.31%
6-month	10.60%	10.76%

2.