Question

2. The following data are taken from the financial market pages of an Australian newspaper.

Forward Margins

Forward Contract	Forward Margins (Buy A$/Sell A$)
1 month	0/1
2 month	1/2
3 month	1/3
6 month	2/4
1 Year	0/1
2 Years	-16/-8
3 Years	-51/-11

The data under the “Forward Margins” column represent the forward contracts for the US dollar with respect to the Australian dollar (given in points form).

(a) Using this data, and the bid-ask for spot USD at 0.7144 to 0.7145, compute the outright bid/ask rates for the following forward contracts:

(i) 1 month

(ii) 6 month

(iii) 2 years

(iv) 3 years

(b) Calculate the forward premium for the following contracts:

(i) 2 month

(ii) 3 month

(iii) 6 month

(iv) 1 year

c) You expect to receive US$ 70,000 in 6 months. What amount in A$ will that convert into of you use the above forward rates?

d) You need to buy US$ 500,000 in 2 years. How many A$ will you need if you use the forward rates above?

e) What do the forward rates indicate in terms of whether the A$ is expected to strengthen or weaken with respect to the US dollar?

Answer 1

Please note the solution The bid-ask for spot USD at 0.7144 to 0.7145

C) Bid Rate after 6 months = 0.7144 + 0.0002

                                        = 0.7146

AS$ after 6 months = 70000 / 0.7146

                             = AS $ 97956.90

D) Ask Rate after 2 years = 0.7145 - 0.0016

                                      = 0.7129

US$ after 2 years = 500000 / 0.7129

                          = $ 701360.64 Answer

E) AS $ is weakening against the US$ since more AS$ is required to buy the US$.